Stocks climb in an oversold bounce, but the path to new market highs is murky, strategists say

Published Wed, Jan 12 20223:43 PM ESTUpdated Wed, Jan 12 20229:58 PM EST

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

The S & P 500 has bounced back from its sell-off in the first week of 2022, but market strategists are uncertain whether this rally will stick. The strategists say they are closely watching the course of Treasury yields and the upcoming earnings season for clues on market direction. Stocks began a comeback from their decline late Monday , and they have largely been on the rise since then. "From an S & P 500 perspective, we're still in a pretty large trading range which hasn't changed yet," said Frank Cappelleri, executive director at Instinet. "I think we still have to wait and see. We've seen fake breakouts, and we've seen fake breakdowns over the last few weeks. Because of that, traders are hesitant to trust some of the moves we've seen over the last few days." The S & P 500 closed up 0.3% at 4,726 .The Nasdaq Composite gained 0.2%, while the Dow Jones Industrial Average was up 0.3%. Tech was particularly hard hit during the sell-off, with the Nasdaq temporarily touching a nearly 10% trough Monday from its recent highs. Tech and growth have been tethered to moves in the 10-year yield, which made a dramatic move higher in the first trading days of the year. After ending 2021 at 1.51%, the 10-year yield topped 1.8% Monday before falling back, according to FactSet data. The yield, which moves opposite price, was at 1.73% Wednesday. Rising yields, or interest rates, have a bigger impact on growth and tech stocks that investors buy for their future earnings strength. A constructive bounce back, but will it stick? Cappelleri said the bounce back in stocks has been constructive. "We see the response the beaten-up tech sector can have even when there's just a little pause in rates. I think more important is to see what happens when the 10-year yield continues higher. That's the test. It's not the direction, it's the pace," he said. Cappelleri said it will be a positive if some of the more beaten-down tech names can show good earnings gains, when the companies report over the next couple of weeks. But while technical strategists agree that the 10-year Treasury yield could have an important impact on the market, they don't all agree on whether the stock market is out of the woods or not after the new year sell-off. "Be non-committal," said Katie Stockton, founder of Fairlead Strategies. "There's been a loss of intermediate-term momentum. You can really see it in the likes of Alphabet and Microsoft , which broke short-term support. Any stocks that are broken, this relief rally or oversold bounce is an opportunity to sell higher and avoid the implications of that breakdown that are immediate-term in nature." Stockton said it will be up to the mega caps to take the major indices to new highs. "We think if that happens, it will be only briefly that we see new highs with a pullback likely to come as earnings seasons reports start to impact equities," she said. "There are looming issues. If we get a good bounce here, we'd be better sellers into that strength." Finding support levels for the market But Robert Sluymer, technical strategist at RBC Wealth Management, said the market has held support and it appears the lows may have been set. "I think it's a legitimate low," he said. "Particularly for technology, we had a 25% move from the May lows to the high we had in Q4 and then a 10% correction. That felt pretty horrible for many investors," said Sluymer. But he said the Nasdaq Composite tested and held some key support around 14,500 which is the 200-day moving average. Mark Newton, chief technical analyst at Fundstrat, said he's not convinced the market is ready to head to new highs, and the behavior of tech is a concern. "Trends have been largely still intact," he said. "The markets held where they needed to back on Monday and that was important. Now, the question is what type of bounce do we get? We saw our first real evidence of technology deterioration." Newton added that "it's difficult to believe we can push back to all-time highs," if tech, a major component of the market, shows evidence of trend damage. He said the rally has been led by energy and financials, and if those two sectors were taken out, the market has not done that well in other areas. "I would rather have a more broad-based push higher," he said. "We've seen tech hardware and semis be the only two groups that held up, but they started to slow. The decline in software has been important, causing a little bit of a break. I think the most important thing to focus on is technology. That's been the building block."

Traders work on the floor of the New York Stock Exchange on Nov. 5, 2021.

Spencer Platt | Getty Images

The S&P 500 has bounced back from its sell-off in the first week of 2022, but market strategists are uncertain whether this rally will stick.