The bear market in stocks is 'on thin ice' as improving technicals challenge the narrative that a recession is near, Fundstrat says
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- The bear market in stocks is "on thin ice" as improving technicals threaten the narrative of an imminent recession, according to Fundstrat.
- The S&P 500 and Nasdaq 100 are both on the verge of showing long-term trend breakouts.
- "It does look like an important structural positive which likely turns the trend higher between early February and mid-March," Fundstrat said.
The strong showing for stocks in January is putting the bear market that started last year "on thin ice," according to Fundstrat's technical strategist Mark Newton.
He highlighted that the year-to-date gains of 5% and 9% in the S&P 500 and Nasdaq 100, respectively, have put the major US indexes on the verge of breaking out of long-term downtrends. Any breakout would go a long way in restoring investor confidence, and would lay the groundwork for more gains to come.
"This is a positive development which not only has surpassed minor downtrends from last Fall, but also is serving to exceed the entire downtrend from last January," Newton said in a Monday note.
And while the gains could falter in the coming weeks as corporate earnings roll in, it still looks like "an important structural positive which likely turns the trend higher between early February and mid-March," Newton said.
Such a move higher would be at odds with the consensus narrative that the economy is on the verge of entering a recession. "This consensus view is getting easier and easier to challenge as technicals continue to improve," Newton said.
Any near-term weakness that hits the market would be viewed as a buying opportunity, according to the note, as it would give dip-minded investors a better risk-reward profile to buy stocks even at a time when sentiment remains off sides.
On that front, while some sentiment indicators like the weekly AAII Investor Sentiment Survey are showing an increase in bullish responses, it's still well below its long-term average. Meanwhile, longer-term sentiment indicators from Bank of America show that positioning to US stocks is at its lowest level in over 20 years.
"While short-term sentiment gauges might be a bit more positive on recent rallies, the longer-term picture still suggests this could be an attractive time for the Buy-and-hold crowd after historic de-risking," Newton said.
The crucial resistance levels for the S&P 500 include 4,000, which was cleared on Monday, followed by 4,100.
"In cases like this where lengthy downtrend lines are indeed exceeded for the first time in over one year, this could present an appealing opportunity to consider that the ongoing downtrend might be changing to an uptrend," Newton said.