The S&P 500 broke into an important new zone Tuesday that could bullish for the market longer term, but it failed to hold onto that level and how it trades Wednesday could send an important signal.
The S&P 500 actually crossed two key milestones when it opened above the psychological level of 3,000 for the first time since early March. But more importantly, it first broke above the 200-day moving average, a momentum indicator that signals the potential for a more bullish tone for the market.
But the rally gave up steam, as tech sold off, and the S&P did not hold those levels into the closing bell. The S&P 500 closed at 2991.77, up 1.2%.
Strategists expect the S&P to continue to take aim at the 200-day moving average, which was just a fraction of a point below 3,000 Tuesday.
"It's not a great sign. It's not game over, but usually you play with a level two or three times, and then you see what the direction is. In the first attempt to get above the 200-day, the bears made a stand," said Scott Redler, partner with T3Live.com. "The weakness in tech brought out sellers elsewhere and the reflationary sectors could not keep things afloat. Tomorrow's a more important day than today to see really if money just rotated out of some tech names so they could buy the beaten down sectors...You don't want to see the market have a complexion change."
Stocks surged as more of the economy reopened, and after Novavax said it started its first human study of an experimental coronavirus vaccine. Positive news on other vaccines propelled stocks higher last week. The Dow Tuesday broke above the psychological 25,000 level for the first time since March 10. The Dow did close above that level at 25,020, a gain of 2.3%.
"We've been optimistic off the lows. It's come a long way. To me, it's not a new trigger to become involved in the market, but for some people it is," said Robert Sluymer, Fundstrat technical analyst. "There are a number of investors who look to be long the S&P above the 200-day and not below it."
For those trend-following investors, it's a "line in the sand," and they can turn bullish on the market when they see the 200-day breached, he said.
The 200-day is simply the average of the closing level of the last 200 sessions. If the price breaks above it, it can pull more investors in and help drive the market higher. The last time the S&P was above the 200-day was March 5, but at that point it was heading below the line, indicating a bearish trend.
Now the question is whether the S&P can get back above the 200-day level and advance. "In 2009, when you first met the 200-day, you spent about two months dancing around the 200-day," said Chris Verrone, Strategas head of technical strategy. "Maybe that's possible here. Maybe you spend a couple months not making much progress, but as long as investors are as defensive as they are, I wouldn't get too negative."
The S&P is now more than 35% above its March 23 low.
Redler said the S&P could be entering a new resistance zone up to 3,080 if it breaks and holds the 200-day. "Every time we've seen a new resistance zone, it's been a better sell than buy, and the market is going to have to prove it can hold that." Redler said 3,080 is a congestion zone the market broke down from in March, around the time the National Basketball Association suspended its season.
"This is the zone we broke down from right when the NBA announced they were closing," he said. "We're basically entering that zone as the NBA announces it's coming back in July." The league has said it hopes to play some games at Walt Disney World in late July.
Redler said the market rally broadened out more last week as small caps, industrials, retailers and energy stocks gained. "Week by week, the active bulls are proving more powerful than the active bears. Traders are trying to trade what's in front of us," he said. "Smart hedge funds have been saying risks to the downside were higher when we first got to 2,700. They were louder at 2,800, even louder at 2,900 and here we are at 3,000."
Verrone said while many portfolio managers don't believe the economy can rebound in a V-shaped recovery, the market appears more optimistic. "The market is telling you the odds of that aren't zero," he said.
For instance, economically sensitive groups have been moving higher, along with the stocks that were hit by the virus. "All the trucking stocks are going higher. The airlines are broken charts that are rallying. The trucks are good charts that are breaking out," he said. He pointed to Knight Swift Transportation, trading at a 52-week high.
"If you look at positioning, people are still very very defensive, very very short," he said. "As long as that's the case the pain trade is still probably higher from here."
Verrone said he likes biotech and pharma, but he also finds the move in Facebook to be interesting and it is an emerging leader of the rally.
"I think the most underappreciated chart in the world may be Facebook. Facebook spent two years doing nothing. Facebook hasn't made anyone money until last week," he said. Facebook broke out to a new high last week and was trading in record territory again on Tuesday before closing lower. Amazon also closed lower on the day after trading in a 50 point range, and Microsoft also reversed. All three edged higher again in after hours trading.
Verrone said for the market to continue to progress, the weak links, like financials do not have to take the lead, but they do have to remain stable.
"Over the last two weeks, the bull-bear battle around the 200-day has been in the crosshairs of a lot of technical folks," said Fundstrat's Sluymer.
If it holds above it, he would then be watching 3,136, the March recovery high, as the next level, if Tuesday's rise above the 200-day holds.
"These are round numbers. Given the amount of cash on the sidelines, will it get people to rethink their bearish view? I imagine we're getting some short covering in here. We'll see over the next week or two whether it's going to stick. The underlying trend is still pretty healthy," said Sluymer.
With the improvement in cyclicals, "you wouldn't even think there's a recession. It just tells you how important it is to focus on the market," Sluymer said. "Don't confuse the market and the economy."
Redler said even with the bullish signs, the market could start to chop. "We've been in this vacuum of good news about vaccinations and reopenings, dislocated form the reality of the economic numbers. The closer we get to July, the more vulnerable the market could be as we seen the next quarter's earnings," he said.