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‘Summer of chop’ could bring a retest of market lows and less love for energy, chart analysts say

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The stock market looks set for a rough summer, even if there are a few good rallies in between, according to analysts who watch charts. Stocks closed slightly higher Monday after ugly losses Friday, and June so far has been slightly positive for the major indices. The S & P 500 closed up 0.3% at 4,121. Chart analysts also say the energy sector, up 60% year-to-date, may not enjoy the same type of run it has been seeing, and that could mean funds ultimately go into high growth tech. Jonathan Krinsky, BTIG chief market technician, calls it the “summer of chop.” He sees the potential for a 900-point range for the S & P 500. “I think we’re in a choppy period before we go lower. The upper end of the range is 4,200 to 4,300. I think we chop around and go down to 3,400, 3,500,” he said. Krinsky said he would expect the S & P 500 to reach its lows in the late summer, early autumn. Strategists have been expecting the market to run higher into the end of year, after a summer or fall washout. Historically, the fourth quarter is typically the strongest quarter in mid-term election years. Ari Wald, Oppenheimer technical analyst, said interest rates continue to be a headwind for the stock market, and when they peak, that could be a turning point for stocks. That peak won’t come until the market is convinced inflation has peaked, he added. But he expects the S & P 500 has already found its low at 3,810, a level that could be retested. “It would be reasonable to retest it. We could even breach it over a couple day period and see some reversal there,” said Wald. “Our view is this relief rally continues over a couple weeks.” The S & P 500’s recent low of 3,810 is just below Wald’s downside target of 3,815. “3,815 is the 38% retracement of that prior bull market. It tested it right on the dot,” said Wald. Stephen Suttmeier, Bank of America technical research strategist, said, in a note, that if the market can continue to rally, the S & P 500 could reach an upside target of 4,308. In order to continue higher, the market needs to show improvement in some key areas, including with more stocks making 52-week highs. Another signal would be an improvement in the number of advancing shares, compared to those that are declining. “If these signals fail to materialize, the immediate risk would shift back to the downside with the 3800s key support,” he wrote in an note. “The rising 200-week MA near 3500 offers important support for the 2022 cyclical correction (aka bear market), or mean reversion, within a secular bull market.” Watch out for energy stocks? Krinsky said the market needs to catch its breath. He expects to see a reversal of momentum performance in the choppy market. “That means energy should underperform and high growth tech should outperform in the chop. Then everything goes down after that,” he said. If high growth finds buyers as he expects, not all of the FANG names and Apple and Microsoft will be snapped up by investors riding the change in momentum. “Microsoft and Apple and Google h ave been acting more like defensives, so I think they actually underperform,” Krinsky said. But Netflix and Facebook could move higher with growth. “Winners get sold and losers get bought,” said Krinsky. Wald said he expects the gains in energy to slow. “On the upside, it’s not necessarily saying energy is going to fall apart,” said Wald. “It’s just that you’ll see leadership move into another area of the market.” He said the energy sector’s rate of change has been 60% or better just five times in the last 95 years. Wald said tech and growth stocks could begin to rebound, but he expects that trend to strengthen later in the year, possibly around when the market retests the low. “You’ll see leadership move to other areas of the market,” he said. “It would just be against historical precedence to see current pace continues.” Wald said growth names would need to turn before broader market heads higher. “To find that bottom and turn higher, we’re going to need the growth stocks to find a bottom and move higher, ” he said.

Traders on the floor of the NYSE, May 25, 2022.
Source: NYSE

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