Author: Xiao Yanyan
The rapid surge in the US stock market on Wednesday quickly subsided, with more than 300 stocks in the S&P 500 index falling in less than two hours, suggesting that investors seeking the market bottom may need to continue waiting.
This is what a series of technical indicators are showing. While US stocks may rise in the next few days or weeks, there are still some hurdles to overcome before a true rebound begins.
The initial enthusiasm on Wednesday was based on data showing that the Consumer Price Index (CPI) rose at the slowest pace in four months in February, which may have given the Federal Reserve reason to cut interest rates earlier than expected. But inflation is no longer the main driver for investors, economic growth is, as well as the trade threat from Trump's tariff policy. Based on this, investors are still on the defensive.
Rose Advisors portfolio manager Patrick Fruzzetti said, "CPI is irrelevant now. Everything is about growth now. Tariff news is a daily driver for the market. These fluctuations will accompany us for some time until a new trade deal is reached, but I don't think that will happen anytime soon."
From a technical perspective, the S&P 500 index has struggled after ending a two-year uptrend this week. Chart watchers believe the S&P 500 index needs to regain its 200-day moving average, which is around 3,737. The index is currently trading around 3,580. The technical picture also shows that the S&P 500 index is in oversold territory, indicating that Wall Street has turned bearish on the stock market.
So the question is, can the current rebound continue?
The S&P 500 index has fallen sharply below its 2-year trend line
Citi's US equity trading strategy head Stuart Kaiser told clients on Tuesday evening, "We are not buyers on the dip." He still sees risks in high-priced tech stocks, and the likelihood of Trump or the Federal Reserve providing a floor is lower, as the US president warned that Americans may feel "a little disruption" from the trade war with Canada and Mexico.
Fundstrat Global Advisors' technical strategist Mark Newton believes that in terms of index levels, traders cannot rule out the possibility of the S&P 500 index falling to 5,500.
The S&P 500 index's 14-day Relative Strength Index was slightly below the key 30 level on Monday, the first time since October 2023. As of Tuesday's close, about 25% of the index's stocks were trading above their 20-day moving average, another sign that investors have turned bearish. Traders typically want to see less than 10% of index stocks above their 20-day moving average before an all-clear signal is given.
When stocks have fallen too far, too fast, with little room left to continue declining, chart watchers consider them oversold. But to confirm the recent market pain is over, further improvement in breadth and volume are needed as technical signals.
US market breadth remains far below its November 2022 peak
The events in the coming weeks - including the Federal Reserve's interest rate decision on March 19, the "triple witching" on March 21 that could increase volatility, and the end-of-month portfolio rebalancing - will be key in determining whether the bears will push the indices lower further.
Macro Risk Advisors' technical strategist John Kolovos believes whether the S&P 500 index can break through 5,665 (last July's high) will be the turning point for the market to either remain range-bound or experience more pain.
Kolovos said, "We are set up for a meaningful rebound, but the speed of the recent decline may leave some scarring."
Piper Sandler's chief market technician Craig Johnson believes that if the S&P 500 index breaks above its 50-day moving average around 5,975, the bulls will regain control. That level is more than 7% above Tuesday's closing price.
"Investor sentiment has become extremely bearish, to the point that it's bullish," Johnson said. "The level of pessimism now is worse than during the 2020 pandemic shutdown, which is crazy. This is not a crisis."
Selling pressure is not yet severe enough to alleviate the crisis
Chart watchers are hoping to see broad-based volume supporting the move, rather than just a few companies driving the major indices higher. The Arms Index, also known as the Short-Term Trading Index (TRIN), compares the number of advancing and declining stocks to the advancing and declining volume.
Strategas Securities' ETF and technical strategy managing director Todd Sohn said a reading above 2.0 indicates investors are selling stocks, while below 0.5 indicates increased demand for stocks. After Tuesday's big drop, the index was at 0.8, suggesting another wave of selling may be coming before the market is ready for a true rebound.
