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Its bounce may have been speedy, but the stock market is still at risk

  • The stock market's speedy bounce may mean it is recovering from the correction. But there are still hurdles the market faces from rising interest rates, the Fed moving too quickly and fear of whether falling stocks could hurt the economy.
  • Some technical analysts say the S&P 500 bottomed when it held its 200-day moving average Friday.

Traders work on the floor of the New York Stock Exchange (NYSE) moments before the Closing Bell.
Getty Images
Traders work on the floor of the New York Stock Exchange (NYSE) moments before the Closing Bell.

Stocks plummeted to correction levels in record time and are now speed-skating their way back to highs, but some investors wonder if the gains are too swift and whether it's premature to signal the all-clear.

Stocks are expected to remain volatile, even though some strategists believe the market found a bottom Friday afternoon and the correction ended at about a 12 percent peak to trough decline on an intraday basis.

There are still some hurdles that threaten the market's gains. For one, analysts continue to watch creeping Treasury yields, which were lower Monday but spooked the market last week. There is also the chance that the economy is too good, and inflation will rise, bringing on Fed interest rate hikes faster than expected.

And now, suddenly there's the opposite fear — the economy could be hurt by market turmoil, so each piece of data is once more very important. The dollar, weaker Monday, was also a worry when it moved higher last week.

Stocks raced higher Monday, with the S&P closing up 1.4 percent to 2,656, giving it the best two-day gain since June, 2016.

"If it is [the bottom], then I wouldn't be surprised if we have a deeper sell-off later in the year. I think it's a tradeable bounce right now because we did test the 200-day moving average. When you think about it, fundamentally things haven't really changed that much," said Sam Stovall, chief investment strategist at CFRA.

Some technicians believe the market has bottomed. The S&P 500 also closed above its 100-day moving average Monday, after turning around at that 200-day level Friday.

Robert Sluymer, technical analyst at Fundstrat Global Advisors, said the next level to watch is 2,417, the 50-day moving average. Sluymer said he believes the bottom is in for now but will reconsider if the S&P can't make it through that next level.

"We'll see if it holds. As far as I'm concerned this is a pullback in an uptrend," he said. "It's textbook, almost too textbook."

Lori Calvasina, chief equity strategist at RBC, said investor confidence has been shaken by the selling which took the S&P into correction territory in 13 days. "One of the big problems with this market was complacency, so that's probably not so bad," she said.

She, too, said the bottom could be in. "These corrections are happening faster than they used to," she said. "On election night, people sort of looked and said strategists got it all wrong, but it did go down. It happened in the futures. It happened overnight. It happened overseas, and it happened really fast."

After President Donald Trump won the election, stock futures went into a deep tailspin during the night right after the election, but after he spoke about his pro-growth policies, they snapped back and the market rallied.

One of the fears hanging over stocks last week was that the 10-year Treasury yield was on a trajectory to 3 percent, from its current 2.85 percent level.

Calvasina said the market should not be concerned by 3 percent but that investors may really be concerned about the changes at the Fed. Jerome Powell took over as Fed chair from Janet Yellen last Monday. While he is expected to view Fed policy in much the same way she does, he is still an unknown.

"I think the issue is people don't want the Fed to move too fast," she said. "I think maybe it's not a coincidence that this is happening at the same time we have a leadership change. I think people are going to watch the economic data closely. It has to be in the context of the economy doing okay."

David Bianco, chief investment strategist for the Americas at Deutsche Asset Management, said he believes the market could be fine with even a 3.5 percent 10-year yield if the economy stays healthy and recession risk remains low.

Bianco said the timing of the correction was also surprising. "A correction amidst upward S&P EPS estimate revisions to strong growth is very unusual," he wrote in a note. "Demanding valuations can exacerbate market dips and corrections, but it's very unusual for a correction to begin as S&P EPS estimates are being revised upward. And there has been no
sudden new news suggesting this trend is about to reverse."

Calvasina said she's watching to see if the turnaround sticks and importantly which sectors will rotate into favor.

Materials, healthcare and energy did the worst in the correction, and Stovall said a strategy to beat the market would be to buy those sectors and also the 12 sub-industry sectors that did the poorest during the sell-off.

"I'd like to see the market get back to business and start focusing on earnings. Last week, you were lurching from theme to theme," Calvasina said.

Earnings expected Tuesday include PepsiCo, Under Armour, Blue Apron, Generac and Martin Marrietta, before the bell. Baidu, Occidental Petroleum, American Movil, Tanger Factory Outlet and Twilio report after the bell.

Apple holds its annual meeting at 12:00 p.m. ET Tuesday.

The NFIB small-business survey is released at 6:00 a.m. ET, and Cleveland Fed President Loretta Mester speaks at 8 a.m.