Technical Analysis | Can the US stock market continue its bull run? Pay attention to this level on the S&P 500!

This article is excerpted from: Barron's

To see a "bull market," the S&P 500 must break through the July high of 4607

The S&P 500 index has risen by about 12% this year, mainly supported by the belief that although the short-term growth of the US economy will be impacted, it will soon stabilize.

Market optimists believe that the Federal Reserve's rate hikes are nearing an end, and the US economy is still growing, which will help drive widespread corporate profit growth. At the same time, large technology companies that have driven the stock market higher this year will receive an additional boost from artificial intelligence.

However, the stock market currently faces several obstacles, and whether investors can see a long-term bull market depends on whether the S&P 500 index can break through a key level that has been difficult to surpass.

The S&P 500 index is currently slightly below 4300 points, lower than the intraday high of around 4607 points reached in July this year. The Federal Reserve's explicit statement that it will maintain high interest rates for a longer period of time is the main reason for the decline in the S&P 500 index, which means that the economy and corporate profits will need more time to regain growth momentum.

To prove that investors' hope for long-term growth is reasonable, the S&P 500 index must break through the July high. However, previous failed attempts to break through the high level clearly indicate that there are almost no buyers at this level, indicating a lack of confidence among investors in the economy and profit prospects.

These concerns may cause the S&P 500 index to further decline, especially as the index fell below 4300 points on Tuesday. Earlier this year, buyers flocked to the S&P 500 index when it reached 4300 points, pushing the index above this level, but this time buyers did not appear.

Walter Zimmerman, Chief Technical Strategist at ICAP, said, "Currently, the bulls need to see the S&P 500 continue to rise and decisively break through 4607 points."

If the stock market can remain stable for a period of time after experiencing a sharp decline in the past few months, it will also be a positive signal, indicating that buyers are starting to enter the market, and the S&P 500 index is expected to rise above 4607 points soon. However, before that, no one can be sure that a new bull market has begun.

Can tech stocks continue to rise?

Some investors are concerned that high interest rates will continue to weigh on the stock market, but Nicholas Colas, co-founder of DataTrek Research, reminds investors not to focus solely on interest rates and Federal Reserve policies. In his research report on Tuesday, Colas wrote, "The valuation of technology stocks sometimes fluctuates with changes in interest rates, but innovation does not care about the yield curve. In the face of the market's struggle to adapt to high interest rates, investors should not forget that it is disruptive innovation, not the yield curve, that drives long-term returns in the stock market."

The tech-heavy Nasdaq has experienced the largest decline among the three major stock indices so far in September. However, Colas pointed out that the 1970s were also a period of high interest rates and high inflation, with bond yields even higher than they are now. Yet, the 1970s were also a golden age of technological advancement, with the introduction of the HP-35 calculator and the Apple II personal computer. From the inception of the Nasdaq in 1971 to the late 1990s, the index not only rose nearly 50%, but also outperformed the S&P 500 index.

Colas pointed out that during the decade dominated by Moore's Law, the long-term returns of the stock market had no correlation with the 10-year Treasury yield.

This helps to better understand the reasons behind the soaring stock prices of the "Big Seven" in technology - Apple, Amazon, Alphabet, Meta Platforms, Microsoft, NVIDIA, and Tesla - as investors are inspired by the enthusiasm for the transformative power of artificial intelligence and machine learning across industries.