The summer rally for the S&P 500 (SPX) has encountered significant resistance at the 5600s level, according to Bank of America (BofA) strategists. After achieving the target for the 2022-2023 bullish cup and handle pattern, the benchmark index experienced a notable 3.0% dip over three days, indicating that the bullish momentum might be slowing down.
“A broadening of the rally as well as rotation, which is the lifeblood of a bull market, suggest that the SPX hit last week’s highs from a position of strength, not weakness,” BofA’s technical strategists said in a note.
“This also suggests that the mid-cycle cyclical bull market from late 2022 may become more than just about mega-cap growth stocks,” they added.
The bank outlines several positive indicators that continue to support the bullish outlook for U.S. equities.
These include more new highs at the index level, breakouts in advance-decline lines, sustained strength in cumulative net up volume, contained credit spreads, and money market fund total net assets near record highs of $6.16 trillion. Furthermore, the improving Chicago Fed Financial Conditions Index is seen as a bullish sign for continued market gains.
However, BofA also points out several tactical risk factors that could hinder the rally's progress. Among these are weekly bearish reversals on the S&P 500 and other indices, signs of tactical upside exhaustion, complacent put/call ratios, and increased bullish sentiment among individual investors as the SPX approached the 5600s in early to mid-July.
Historically, the summer months of the Presidential election year, particularly June, July, and August, have shown the best average returns.
“3-month seasonality shows the SPX up 75% of the time on an average return of 7.3% from June-August,” strategists noted.
However, the weaker September-October seasonality suggests a potential pre-election dip, followed by a stronger rally towards the year-end.
From a tactical point of view, the SPX faces gap resistance at 5622-5640 and gap support at 5409-5375. The rising 50-day moving average at 5417 provides additional support, with significant retracement levels identified at 5487 and 5430.
These technical levels are key in determining the market's next move, with the early 2024 breakout above the 4800 area projecting a potential target of 6150 for the index, BofA’s team said.