Santoli: The S&P 500 cleared a major hurdle, but another level of resistance awaits

Published Mon, Aug 1 20221:31 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. The market rushed up to a crucial level in the past week and month . It is pausing there to survey the scene. The worst first half in a half-century is followed by a +9% month in S & P 500 , allowing resolute bears to dismiss the action as a mere squeezy oversold bear-market bounce while sending a few signals to optimists that the push higher was broad enough to have positive implications for the next 6 to 12 months' equity returns. The first hurdle was cleared: a decisive break of the April-July downtrend and the 50-day average, placing the S & P 500 right at its 100-day average and the top of a roughly three-month range. Plenty of obvious resistance sits above (4,230 is the halfway point of the entire decline from the January peak) but the market has done enough to suggest mid June was a plausible important low. Bulls will point to a few "breadth thrust" signals that were triggered by the rally, such as a heavy majority of stocks hitting 20- and 30-day highs and a resurgence in the advance-decline tally. Helpful indicators, but not in themselves insulation against backsliding. Technical strategists in general are wary of saying a new uptrend has begun – but the honest ones concede that historically when the weight of the technical evidence says a bottom is in, the S & P has been up on average 17% to 18% from its low. The market has burned up plenty of skepticism, though hedge-fund positioning remains quite defensive/short, setting up an interesting contrast (still) with retail investors who have not liquidated in a comprehensive way and seem to have been energetic net buyers last month. The market's ability to absorb some messy earnings reports and continued cuts to future quarters' profit estimates suggests the valuation compression since the start of the year prepared many stocks for rougher results. This isn't the same as saying all potential recessionary profit declines are "priced in," but means corporate operators are feeding off healthy nominal gross domestic product growth and are managing to beat tempered expectations for now. That said, overall market valuations are more accurately described as fair rather than cheap, the S & P 500 back above 17.5-times forward consensus earnings. Much of that is the residual stoutness of the premium in huge-cap growth stocks, which have outperformed this quarter. The equal-weight S & P 500 forward price-earnings looks quite a bit more modest, both in absolute and relative terms: The cost of capital across the board has declined, another way of saying financial conditions have eased. From Jurrien Timmer of Fidelity: This raises the question of whether this loosening of financial conditions and coincident rekindling of risk appetites will be frowned upon by Federal Reserve policy makers wishing still to convey single-minded resolve to choke off inflation. Former New York Fed President Bill Dudley in an op-ed says as much, suggesting the market is misreading the policy outlook by pricing in a peak in short-term rates in a few months and rate cuts in the first half of next year. Perhaps this is right, but Chair Jerome Powell conceded the economy has yet to feel the full impact of the tightening already put in place, has called the rate hikes a "front-loading" maneuver and concedes that growth has flagged. Given how radically the Fed rate path has shifted in the past six months, it's probably best to be humble in declaring the market right or wrong over the next six months. Cuts could come next year the easy way (soft-ish landing, Fed pivot) or the hard way (unequivocal recessionary data), or not at all. But rates are in the ballpark of neutral, the next meeting isn't for another seven weeks, so we are in a wait-and-see window, which equities seem OK with for now. Market breadth is mixed-to-negative, showing some digestion of recent gains. Narrow, summery range. VIX gets a bit of a lift, partly the "Monday effect" and likely some locking-in of recent index gains via hedging and sensitivity to headlines about U.S. House of Representatives Speaker Nancy Pelosi 's possible trip to Taiwan giving traders another macro/geopolitical element to worry about.