As stocks surge, some chart signals have been looking better despite lingering risks

Published Thu, Feb 2 20231:29 PM ESTUpdated Thu, Feb 2 20235:50 PM EST

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

Stocks have marched higher since the start of the year and are looking technically stronger, suggesting further gains even with risks to the rally on the near-term horizon, according to analysts who follow market price charts. Fed Chairman Jerome Powell triggered a surge in stocks when he spoke Wednesday , taking the S & P 500 into a new range. The index sailed above 4,100, the low from December, and now technical analysts look to that level as support for a new higher range. The S & P was climbed again Thursday, closing at 4,179, above another technical target at 4,170. The index is up 8.9% for the year so far, defying, for now, a near consensus forecast for a first half market rout. Big cap tech led the rally with Meta Platforms up 23% in a post-earnings move. Apple joined it, gaining 3.7% and rising above its 200-day moving average around $148. Alphabet and Amazon each rose sharply, with gains of 7.3% and 7.4% respectively. All three companies reported earnings after the closing bell, and they were lower in afterhours trading on either disappointing earnings or commentary. "The market is embracing risk here," said Ari Wald, Oppenheimer technical strategist. "The near term day-to-day will always be open to market noise, but it's about identifying the larger underlying play here." Wald said he tracks the Invesco S & P 500 High Beta ETF, which represents bull market activity and has surged back to levels not seen since early April. "You're seeing rotations in to high beta cyclicals. It's been a very risk on rotation...You've see a big turn in market leadership," he said. SPHB 1Y line high beta Wald adjusted his S & P 500 forecast this weekend and now expects the index could overshoot to 4,600 in the first half of the year before ending 2023 at his unchanged target of 4,400. "The S & P pushed above 4,100. The price action is there, and there's an obvious discrepancy between market data and economic data," he said. "The market in our view is signaling a recession is not imminent here." Wald said big tech names are the last area of the market to work positively, and their weakness had masked improvements in the broader group of S & P stocks. "This had weighed on the market most notably in the fourth quarter," he said. "Now, we're starting to see Meta, Apple, these mega cap stocks that are mathematically important are starting to move above those thresholds as well...It's been a very strong run this past week. There could be some consolidation near term, but it's playing by bull market rules — buy the pullback in anticipation of more gains." Scott Redler, partner with T3Live.com, tracks the market's short-term technical signals, and says the big three tech earnings reports (Apple/Amazon/Alphabet) could be a test for the bullish trend. He said the market is at more risk of trading lower after those reports, than higher. "At this point, if you haven't been long actively between Jan. 6, when this rally started and today, today is not your day to get aggressive. But Meta, which was up a lot in January proved it could go higher," he said. As for the big three earnings, "they're going to need very solid reports to tack on gains. All three of them went up every time the other stocks, like Tesla , reported and went up. It's going to be very hard to get more upside unless their earnings hit on all cylinders." The three are important for the performance of the overall market, particularly Apple, because it is the largest single stock by market capitalization and is a big part of the S & P 500, Dow Industrials and Nasdaq. Apple made a technically positive move Thursday, rising above its 200-day moving average of about $148. Redler expects a near term peak for the S & P 500 could be around 4,200-4,220. "Then the market will be tested again," he said. The S & P 500 rose above its 200-day moving average last week and has continued to rise. The 200-day is simply the average of the last 200 closing levels, and it is a sign of positive momentum if it can rise above that threshold and stay there. "We're on the sixth day being above the 200-day moving average, which is the longest streak going back to March, 2022," said Art Hogan, chief market strategist at B. Riley Financial. .SPX 1Y line spx He added that another sign traders are watching is the potential for a golden cross, where the 50-day moving average rises above the 200-day and closes there. The 50-day, currently at 3,970, could close above the 200-day, which was 3,953, on Thursday for the first time. That would be taken as a positive signal, but Hogan said the fact the S & P is holding the 200-day is a more important sign for stocks. The S & P 500 and Nasdaq were both higher Thursday, as the 10-year Treasury yield continued its slide to a low of 3.35%. The dollar was higher after touching the lowest level since April earlier in the day. The Dow lagged and was lower, as some big components declined, including UnitedHealth , Caterpillar and Merck. "The dollar [decline] helped get risk back on. Rates have come down to take the pressure off a lot of these names," said Todd Sohn, Strategas technical analyst. "First you saw it abroad with Europe, and China too...Now, you're really seeing it start to reflect in the U.S., being led by consumer discretionary, home builders, retail. Semiconductors have come back on the field too. That's very good discretionary appetite." "I think the most important thing to me is you had a very good expansion of new highs," Sohn added. He's watching the growing number of three-month highs in the Russell 1000 and S & P 600 , which are now outpacing the new highs in the S & P 500. The 36% of the Russell 1000 touching new three-month highs Wednesday was the highest level since May, 2021, he said. There are also some technical signals that are not positive. Fairlead Strategies founder Katie Stockton points to the low level of the VIX, the CBOE's Volatility Index. The VIX is based on puts and calls in the S & P 500. It was at 17.75 Thursday, after setting a new 52-week low of 17.06 earlier in the session. .VIX 1Y line vix "The VIX has reached a contrarian extreme," Stockton wrote in a note. "The low reading is a bearish indication for the SPX, assuming the high-volatility regime still has a hold. A bullish regime change would require two consecutive weekly closes below 18.45." Sohn also cited the fact that fed funds are now trading above the entire Treasury yield curve, "The 2-year fed funds spread is inverted. That's pretty consistent with a recessionary environment. I do want to be mindful of that," he said. "It's very uncommon to see that happen." Other near-term threats to the rally include the January jobs report Friday morning, which could trigger concern about more rate hikes if it is very strong or wages rise more than anticipated. In addition, the Fed chair makes another appearance Tuesday morning, speaking to the Economic Club of Washington D.C. "He will have a chance to walk back those dovish comments," Redler said. "If we're at 4,200 going into those Powell comments...this could set up a short-term top into next week." Redler said the market's current feel is similar to last summer. "It could be the same type of move we had in July and August. The market moved faster than anyone thought. Then it peaked and went to the lows of the year," he said. "I'm not saying that happens. But actively, there's been a lot to like, a lot to trade, but we're getting closer to levels that are going to get harder to get above based on pure mechanics."