The S&P 500 just passed a critical level.
DreamstimeIf recent history is any guide, stocks may be set to jump 10%—quickly.
Investors bought the dip after the S&P 500 fell as much as 4% between mid-February and early March, amid a mini spike in interest rates. When the return on Treasury debt rises so quickly, riskier stocks appear less attractive. But since the lowest point of the retreat, the S&P 500 had risen 4% through Thursday.
Most important, the S&P 500 closed at an all-time closing high of 3,939 Thursday, a level the index couldn’t surpass before its mid-February decline. That’s a critical breakout point for technical analysts, Fundstrat Global Advisors’ head of research Tom Lee wrote in a note.
Here’s where recent history is a guidepost for the near future. After the last two meaningful declines in the index in the past nine months, stocks exploded higher in a short period. History could repeat itself.
After a decline in June, the index rose 11%, then weakened. After a similar fall in September, the index rose 10%, but then fell back. Lee believes that the index is more likely to burst higher, before weakening, than to continue falling meaningfully.
A 10% move from Friday’s level would get the S&P 500 to just over 4,300.
To be sure, if Treasury yields jump again, the S&P 500 will find it challenging to advance. Higher rates dent growth-stock valuations, and roughly a quarter of the index’s market capitalization is comprised of technology stocks, generally regarded as growth investments. Weakness in those stocks could drag the index lower.
Importantly, rates are rising because the economy is firming, which often means inflation is coming. But it’s complicated: Strong earnings growth is, usually, consistent with rising rates. Stocks tend to rise when earnings increase.
Still, investors might be rewarded with nice gains soon.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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March 13, 2021 at 03:35AM
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Why the S&P 500 Could Rally Really Soon. - Barron's
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