With the S&P 500 near a record, analysts want to see a 'definitive breakout' before buying more

Published Thu, Aug 13 20206:45 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

The S & P 500 could be on the verge of a big move higher, but it needs to show it can definitively break above its previous highs first. The S & P 500 ended up 1.4% Wednesday at 3,380, just below its record close of 3,386. The S & P temporarily crossed above that level in afternoon trading to 3,387, but was still also shy of its Feb. 19 intra-day high of 3,393. "The point is we want to see a definitive breakout rather than just partially touching a level there and correcting again," said Ari Wald, technical analyst at Oppenheimer. "I think with the market up against seasonal headwinds and some overbought trading conditions, it would be likely to see a sell off first, ahead of the breakout." Wald and other strategists say they expect the S & P to make another big move higher, but it would be a smoother ride if there was a shakeout and the market sold off first, consolidating its recent gains. There's plenty of reasons for investors to be nervous about the market, including the fact that Congress has still not come together on a next round of stimulus and the uncertainty around the looming presidential election this fall. Worries about resurgence of the coronavirus and the lingering impact of the big hit to economy, including high unemployment, are also headwinds for stocks. But at the same, the Federal Reserve has helped stocks glide higher, by using its programs to keep financial markets liquid and interest rates low. The S & P is up more than 50% from its March 23 low. Strategists are encouraged by the S & P's latest move, since it is being swept higher by a broader range of stocks. Underperforming sectors have become the best performers in the past few weeks, and the leading S & P tech sector has dropped to a mid-tier performer, up just 5.3% in the past month, similar to the 5.4% gain in utilities. Industrials have led the charge, up 14.1% in a four-week period where the S & P 500 has gained 6.1%. Second best has been the S & P materials sector, with a 7.9% gain and then financials, up 7.4%. "You're seeing better action in capital goods, better action in housing stocks. Select materials are doing better," said Wald. "It's broadening out here. It's not just a tech led rally. Tech and health care." The dominance of big tech names, like Apple, Microsoft, and Amazon has been a concern for some in the market, since those companies and just a couple of others have been responsible for the bulk of the S & P 500's return over the past year. Amazon is part of the consumer discretionary sector, and other mega tech Facebook and Alphabet are in the communications sector. Semiconductors, part of broader tech, have been part of the cyclical rally. The VanEck Vectors Semiconductor ETF was up 3.2% Wednesday. "I think tech has enough cyclical attributes to catch up. It's still this all weather leadership, and it's really rallying at a steady pace," said Wald. "It's not a bubble in tech. It's a bubble in sector dispersion. If you were to look at tech alone, it's really rising at a steady pace versus how is done historically." Wald said it will be important for the S & P to regain its previous highs. "It's a prior level where the market sold off from, so when you're able to clear these prior resistance levels, it's an indication of new demand coming into the market." Matt Maley, chief equity strategist at Miller Tabak, said some investors get wary when the market returns to highs. "It does bring in the old double top thinking," he said. But a pullback of 5% to 7% or even more would be a positive. "I firmly believe that would actually be much better for the long term implications for the market. It would help digest the gains a little bit and feel more comfortable with the level we're at," he said. Maley said if there was a pullback, some of the overcrowded names may not recover as quickly. He said it would be better for the market to sell off now. August and September are among the two worst months for the market historically. That could clear the way for a year end rally, as often happens in an election year. "That's the one that gets you the real breakout," he said. "That's a better scenario than an immediate breakout. If we go straight up from here, we're talking a bubble and the correction becomes severe."

A view of people passing by New York Stock Exchange in Wall Street amid Coronavirus Pandemic on April 5, 2020.

John Nacion | NurPhoto | Getty Images

The S&P 500 could be on the verge of a big move higher, but it needs to show it can definitively break above its previous highs first.

The S&P 500 ended up 1.4% Wednesday at 3,380, just below its record close of 3,386. The S&P temporarily crossed above that level in afternoon trading to 3,387, but was still also shy of its Feb. 19 intra-day high of 3,393.

"The point is we want to see a definitive breakout rather than just partially touching a level there and correcting again," said Ari Wald, technical analyst at Oppenheimer. "I think with the market up against seasonal headwinds and some overbought trading conditions, it would be likely to see a sell off first, ahead of the breakout."