Comeback could get fuel from earnings before running into Fed turbulence again, chart analysts say

Published Mon, Jul 18 20221:26 PM EDTUpdated Mon, Jul 18 20224:34 PM EDT

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

Stocks are showing signs of being closer to a bottom, even though there could be another burst of turbulence when the Federal Reserve meets next week, according to analysts who follow charts. Stocks initially jumped Monday on top of Friday's gains, which came even after Thursday's super hot consumer price index showed inflation at a 9.1% year-over-year pace in June . But a report about a possible hiring slowdown at Apple sent stocks lower, and the S & P 500 closed down 0.8% at 3,830. Strategists are reluctant to say the market has already hit bottom, and they point to indications that stocks could traverse more bumpy stretches before rallying in the fourth quarter. One of those times could be around the Fed's July 26-27 meeting, where it is expected to raise interest rates by three-quarters of a percentage point. But they do agree, the lows, if not already made, could be getting closer, and there are some positive signs that could take the market higher for now. Oppenheimer technical analyst Ari Wald said he is encouraged by the market's progress, but he too pointed to the fact the market could face choppy trading around the Fed meeting this month and again in the seasonally rough month of September and early October. "Whether it was a low or the low, the point we want to stress is this is the secular bull market's next opportunity. Our indicators suggest we're close to a bottom," said Wald. "June could have been it, and this is an opportunity for long-term investors. We think it's going to be a growth-led recovery." What to buy For that reason, he is recommending big cap growth in technology and health care. "Generally, we still have a preference for large over small, large-cap biotech over small and large-cap tech versus small cap," Wald said. Wald said the "high octane" growth names that are often smaller cap and may not have earnings could be a quick trade, gaining in the short term only before another downturn. One example is the ARK Innovation ETF, which was rallying more than 3.5% Monday before closing off 0.1%. "You need a short leash," on the super high growth names, he said. But as for other areas that have been beaten down, he is favoring growth over defensive and looking at names like Apple, Amazon , and Alphabet . "Large cap growth have that nice in between where they're going to do well. You capture the growth spot that should provide rotation off the low," said Wald. He added that there could be seasonal headwinds. Apple had a rough day Monday, after a Bloomberg report said the iphone maker plans to slow hiring and spending on growth next year. Shares of Apple declined 2%, and its downturn impacted the broader market. "Our view is there's more to this move on the upside. I don't think that counter trend move has exhausted itself. There still could be something lurking in that September/October period where the market is prone to volatility," said Wald. "If we do get that final leg lower, that could set up for that higher fourth quarter." Wald said his road map indicates the first half of the year should be weakest, followed by basing in the third quarter and then a fourth quarter move higher. "Our market cycle indicators measuring internal breadth and sentiment were washed out at levels that were followed by above average returns," he said. Wald said of the 10 checklist items he is watching, eight of those have signaled a market bottom. For instance, Oppenheimer's bullish composite fell below 20%, to 10%. There were also less than 20% of New York Stock Exchange stocks above their 200-day moving average, a positive momentum indicator. But one indicator that has not yet sent a signal is the duration of the time between the S & P's peak to trough. It is currently five months, but the target is seven months. There are also too few new highs among S & P 500 stocks. For the short term, some say the market has a strong setup, but that could be put to the test by Netflix earnings Tuesday and Tesla 's report on Wednesday. "There are three signals we can bounce off the bottom," said T3Live.com partner Scott Redler, who follows short-term trends. "The first was when the semis didn't go down on Micron's underwhelming report. The second signal was the hot CPI report was bought, and then on Friday, Citigroup basically put the lows in for the banks. Three different things helped the market get away from those June lows." Citigroup stock was up 0.2% Monday, after gaining Friday on better than expected earnings. Micron continued to gain Monday, but turned lower later with the broader market. The VanEck Semiconductor ETF was down 0.7%. "Now all eyes will be turning to Netflix and Tesla to see whether or not these two could actually have some real power versus oversold bounces. Most of these rallies off the lows have been rejected into resistance," said Redler. The S & P 500 could meet resistance at 3,944, he said. "If the S & P can get above and stay above that spot, it might breed more confidence for things to head toward the 4,170 area," he said, adding there certainly could be more selling and that it's hard to know where the lows will be. But beware the Fed Mark Newton, Fundstrat head of technical strategy, said he expects the market will retest its lows, and his indicators are pointing to a sell-off that could occur the week of the Fed meeting, starting Monday. "The next low should be the low," said Newton. He expects the low could be seen in the next couple of weeks and possibly retested. "You might have a big downdraft in September, October, but the fourth quarter should be good. We'll see about next year," said Newton. For now, Newton said the market is nearing its lows but the tone is better. "There's far fewer stocks hitting new lows," he said. "There's only 4% of the Nasdaq hitting new lows. When that peaked back in May, that was at 33%."