S&P 500 passes ‘stress test level’ after bouncing off 200-week MA

According to Bank of America (BofA), the S&P 500 index has passed a “stress test level” after bouncing off its 200-week moving average.

Per Monday, the 200-week moving average of the S&P 500 index was at 3,605. The index has hovered around that level in the last three weeks, closing higher in two trading weeks.

"The five prior cyclical bear markets of 20% or more during secular bull markets ending in October 1957, June 1962, August 1982, December 1987 and March 2020 saw the S&P 500 test, undercut or spend some time below its rising 200-week moving average,” BofA analyst Stephen Suttmeier said.

Suttmeier explained that the S&P 500 needed to regain a critical 40-week moving average to avoid a bearish trend in the near future and ensure a long-term bull market. A failure to reach the target “after correcting to or below” the 200-week moving average is usually a sign of a secular bear market.

The index’s 40-week moving average per Monday was at 4,102, indicating a potential 11 percent climb from its current levels. Analysts have predicted that the S&P 500 will perform well in the near future since the stock market usually performs well in the last quarter of the year, especially with the mid-term elections being held in November.

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Suttmeier argued that if the S&P 500 failed to regain its 40-week moving average during the elections, the risk for a bearish trend would increase. If the market reaches a decline of up to 3,200, the BofA analyst said that it could potentially fall by 13 percent from current levels.

Despite a 25 percent decline in the S&P 500 index this year, the stock market maintains its 10-year-old secular bull market.

Stock market rallies on Monday

The stock market closed at a higher position on Monday, following the publication of BofA's financial report, which showed a solid result in Q3.

The S&P 500 closed at 3,681.97, gaining 98.9 points or 2.76 percent, the Dow closed at 30,213, adding 578.17 points or 1.95 percent, and the Nasdaq Composite ended the trading day at 10,685.55, gaining 364.16 points or 3.53 percent. All sectors in the S&P saw gains on Monday, with banking companies growing 3.50 percent.

The interest rate hikes implemented by the Federal Reserve contributed to higher earnings in the banking sector. BofA gained 6.09 percent, despite spending an extra $378 million on its loan-loss reserves to deal with the economic slowdown. NY Mellon Corp’s shares grew by 5.23 percent. Goldman Sach’s share value also increased by 1.97 percent per Friday.

Stock prices are projected to keep climbing in Q4, although Wedbush Securities VP senior VP Stephen Massocca said that the Fed’s aggressive rate hikes might hinder that growth.

"A big part of this rally is sort of the massive undervaluation that took place when the Fed started raising rates that is kind of unwinding, which makes me think what kind of legs does this rally really have and can the market really take off and perform wonderfully if the Fed is continuing to be in tightening mode," Massocca said.