With the S & P 500 closing out a rocky first quarter, technical analysts see a stock market comeback continuing in the near term, but say there could be trouble down the line. Stocks just finished off their worst quarter since March 2020 amid Russia's invasion of Ukraine and the start of the Federal Reserve's aggressive rate hiking cycle. But the S & P posted a surprising recovery from recent lows in March, even with a couple losing sessions to end the month. The S & P 500 is up 13% from its low for the quarter and sits about 6% from a new record. "It's obviously a very impressive relief rally, and that rally still does have positive short-term momentum," Katie Stockton, founder and managing partner of Fairlead Strategies, said. Individual stocks clearing their 50-day moving averages should "foster additional upside," Stockton said. Heavy volume in the New York Stock Exchange's advancing names is another sign of the rally's potential strength, according to Ari Wald, head of technical analysis at Oppenheimer. "It indicates that there is conviction behind this rally. And I think it does argue for additional upside, especially as we push into April, which is typically a seasonally strong month of the year for the S & P 500," Wald said. April is the best month on average for stocks since 1950, according to LPL Financial. The S & P 500 has been positive in April for 15 of the past 16 years. ( Source: LPL Financial ) However, April is followed by the Wall Street adage of "sell in May," a seasonally weak period of the market. Wald said May could coincide with hard-hit parts of the market — small-cap growth stocks, like those heavily represented in the Russell 2000 — reaching key resistance levels, which could "act as a headwind for overall equity markets." Stockton holds a neutral longer-term view. "We think we're in more of a range-bound environment this year, in which we will try to take advantage of these swings that are more intermediate-term in nature," she said. Bear market bounce? John Roque at 22V Research believes the stock market rebound is a bear market rally, a temporary uptrend in a longer-term down period. "Bear market rallies are often sharp, impetuous and beguiling," Roque said. Roque believes short-covering could explain the current rally. In short selling, an investor bets that a stock will decrease in value. Therefore, the investor borrows shares and sells them, in hopes of buying them back at a lower price. Short covering is purchasing the securities to close out an open short position, either at a profit or a loss. Through mid-March, short-sellers hiked their bets on a decline in the U.S. stock market, according to S & P Global Market Intelligence. From mid-December 2021 to mid-March 2022, short interest in the S & P 500 has increased from 2.09% to 2.2%. As the market started to rebound, they were likely forced to buy stocks to cut their losses. "It was likely driven by short-covering, more concentrated buying, and I don't think it was particularly broad, Roque said. Roque pointed to the 15 rallies in the Nasdaq Composite during its bear market from 2000 to 2002. The Nasdaq Composite is up 13% from its quarterly low after briefly falling into a bear market. "There's no way to know when it ends," he said. "But maybe this is when you start to see some of the fraying of the rally and the market start to be more discerning as to what will work or what will not work." —Crystal Mercedes contributed to this report.
A specialist trader works inside his post on the floor of the New York Stock Exchange (NYSE) in New York City, March 10, 2022.
Brendan McDermid | Reuters
With the S&P 500 closing out a rocky first quarter, technical analysts see a stock market comeback continuing in the near term, but say there could be trouble down the line.