The S&P 500, already at multi-year highs, could easily take aim at 1500 before a significant retreat, some technical analysts say.
While many fundamental strategists say a pullback could be in the offing, the stock market’s underlying technical strength has some technicians stretching out their charts and looking to the far right for more action.
There are plenty of reasons to be concerned at current levels, including the election, uncertainty about Europe, China’s economic weakness, and the so-called fiscal cliff. But the market is sending other signals, and now big investors are chasing its gains.
“In principle, the market is five to six months ahead of fact,” said Carter Worth, chief market technician with Oppenheimer Asset Management. “The charts reflect the judgment right now of major market participants, and major market participants are now saying the fiscal cliff will be resolved.” The fiscal cliff is the dual expiration of Bush-era tax cuts and the automatic spending cuts that will kick in starting Jan. 1 if Congress does not act.
Worth says his next target for the S&P is 1495. “We’re in the process of exceeding April highs now. I would say that is a reasonable objective for this particular instrument,” he said. Worth said the market has been behaving well, with the breadth of stocks participating in the rally improving.
“A lot of things have been held out as being problems. Most have fallen by the wayside,” he said.
Europe was one factor, and a new bond buying program announced by the European Central Bank last week helped send stocks above the April highs of 1422 and hold above there.
The S&P 500 closed at 1433 Tuesday, up 4 points, and it is now up 14 percent since the start of the year. It finished at 1437 Friday, the highest level since January, 2008. The S&P’s all-time closing high was 1565, in October, 2007.
The Dow, meanwhile, rose 69 points Tuesday to 13,323, its highest close since Dec. 28, 2007. The Dow is up 9 percent year-to-date and is now 5.9 percent below its record October, 2007 closing high of 14,164. The Nasdaq was up 0.5 points Tuesday to 3104, and is up 19.2 percent year-to-date.
“From a technical perspective, we still like what we see in the market,” said S&P Capital IQ chief equity analyst Sam Stovall. “Our technical analysts thinks we could see the S&P 500 at the 1500 level, heading into the fourth quarter. From a historical perspective, I would agree.” Stovall said since 1945, the average advance after the market gets back to break even levels from a selloff, usually is 4.5 to 8 percent in an average time frame of three months.
The expectation that the Fed could announce another round of quantitative easing Thursday has also been a plus for stocks. The Fed begins its meeting Wednesday.
“The market is basically saying we’ve been propelled by two words—anticipated stimulus—and this has been both domestically and internationally, and the market knows you don’t fight the Fed in general because you don’t fight liquidity,” he said. Stovall said the market will likely digest its gains soon, before moving higher, and a lack of Fed action could cause selling.
Piper Jaffray’s Craig Johnson is even more optimistic. “Despite investors’ pessimistic mood toward the broader market, last week the S&P 500 broke out to new highs for 2012,” he wrote in a note Tuesday. “We believe this opens the door for a retest of the upper end of the secular bear market trading range (1550) in coming months.”
Paul LaRosa, chief technical analyst at Maxim Group said he is watching for the S&P 500’s move to be confirmed by the Dow.
“What I want to see first is the Dow Jones has yet to close at 13,338. That’s critical. The Nasdaq already confirmed over 3134, so the Dow is crucial and I would like to see the Russell (2000) over 847. If those two things can happen, we’re going to get an additional move to the upside,” LaRosa said. “If it doesn’t happen, that will be a negative divergence. That would lead to a sell off but it would be modest in nature.”
LaRosa said he is encouraged by the number of stocks making the new high list, which included 300 new NYSE highs in two days last week. “Maybe it’s that Fed action is coming. Maybe it’s Europe is not as bad as thought. Maybe it is Republicans getting into office. Those are all possibilities, but it seems money is coming into this market and it’s testing important resistance levels,” he said.
LaRosa said the S&P has next to tackle resistance at 1439, and the level he is watching after that is 1576. “I believe the charts are going to tell you the ultimate outcome, whether it’s positive or negative. That’s really the unbiased opinion. That’s people putting their money to work,” he said.
Worth said the market rally has been extremely hated but now some fund managers are trapped, and have no choice but to jump in, which is helping drive prices higher.
“My hunch is there’s more to come. It’s not finished. We haven’t had a summer rally in five years, and we just had a summer rally,” Worth said.
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