The S&P 500 remained above key levels monitored by traders despite conflicts in the Middle East that roiled stocks, a testament to the resilience of U.S. stocks and a sign of a big rally ahead.
Piper Sandler’s Craig Johnson said he’s betting that extremely oversold conditions and the index’s ability to hold above key technical support at 4,200 set the stage for a rise of about 14% between now and year-end.
“We’re at the lowest end of this uptrending price channel, and it’s going to take a lot of effort to break through that level,” Johnson, the firm’s chief market technician, said in an interview. “When you’re oversold, you’re Back at the end of the passage. Falling out of a basement window won’t hurt.”
The S&P 500 fell 1.3% on Friday to close at 4,224 points, just above the closely watched 4,200-point mark. Recent weakness on the prospect that interest rates will remain high has sent U.S. stocks down for a third straight month, undermining a strong rebound from last year’s rout.
But Johnson and some others on Wall Street are betting that the recent surge of extreme pessimism, coupled with seasonal tailwinds, could lead to another rally before the end of the year.
Johnson said the volatility has pushed nearly 30% of stocks in the S&P 500 to oversold levels, which is technically defined as a Relative Strength Index reading below 30, which is considered a “momentum washout.” .
Such conditions, he said, often lead to “quite constructive and quite positive” returns. In fact, he expects “more than just a relief rally” in U.S. stocks and predicts the S&P 500 could hit 4,825 by the end of 2023.
Bank of America Corp.’s Michael Hartnett echoed a similar sentiment Friday, saying investors have become so negative on stocks that trigger countertrend “Buy signal.”
However, concerns remain that stocks could fall if the economy stalls or Israel’s war with Hamas expands into a broader conflict in the Middle East.
Even within Piper Sandler, there is little confidence that U.S. stocks will end the year strong. Michael Kantrowitz, the firm’s chief investment strategist, set a year-end target range for the S&P 500 of 3,600-3,800, one of the most pessimistic target ranges on Wall Street.
Downside risks could still vindicate Wall Street’s bears. Federal Reserve Chairman Jerome Powell said on Thursday that although policymakers are likely to keep interest rates steady at their November meeting, they are still considering further raising interest rates to curb inflation, which poses a threat to the economy and business growth. Additionally, consumer spending is likely to decline as Americans burn through pandemic-era savings and resume student loan payments.
Still, Johnson said “you have to think about the headlines versus the trend line.” If the trend line isn’t broken, investors who have been waiting to deploy pools of capital will start to pour in.
“I think more and more people are starting to worry about missing out on the upside and missing out on the downside,” Johnson said. “We’ve already experienced a decline in 2022, bottomed out a year ago, and momentum bottomed out. This is just a check.”
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