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The Tell: Stock-market bottom or bear market bounce? What traders want to see as S&P 500 extends gain

U.S. stocks on Wednesday were attempting to build on a big and broad Tuesday bounce, but skeptics aren’t yet convinced the move is more than a bear-market rally.

Tuesday’s rally was “undoubtedly impressive, especially following a sharp reversal lower the previous day,” said Kevin Dempter, a technical analyst at Renaissance Macro, in a Wednesday note.

The Dow Jones Industrial Average DJIA, +0.15% jumped more than 750 points, or 2.4% on Tuesday, while the S&P 500 SPX, +0.59% advanced 2.8% and the Nasdaq Composite COMP, +1.58% rallied more than 3% — the biggest one-day percentage gains for the major indexes since June 24, leaving them at six-week highs. Major indexes added to gains Wednesday.

Market internals were robust on Tuesday, Dempter acknowledged, which suggested buyers were urgently snapping up stocks as the NYSE TRIN, or Trading Index, a breadth oscillator that measures internal market strength or witness, hit .369 and the Russell 3000 percentage of advancers and up volume came in at their highest since the COVID-19 lows in 2020. Data has shown large speculators, mostly hedge funds, had moved net short on S&P 500 index futures, which typically sets the stage for solid forward returns, he noted, alongside other factors that typically point to near-term gains.

That may set the stage for further gains, with the S&P 500 capable of making a run toward resistance around the 4,000 level, Dempter wrote. It isn’t enough, however, to sound the all-clear on a bear market that still has the large-cap benchmark nursing a year-to-date loss of more than 17%.

“Calls for a market bottom are sure to occur after days like yesterday, but we don’t think the market is out of the woods yet and still consider this a bear market rally,” Dempter wrote.

Renaissance Macro Research

What would it take to signal the lows are in? Dempter said RenMac would be looking for a “thrust” in the percentage of stocks in the S&P 500 making 20-day highs above 53% (see chart above) and the percentage of issues trading above their 20-day moving average greater than 93%, with both measures currently running shy of those levels.

While breadth has been showing significant improvement, there are still more stocks making new 52-week lows rather than new 52-week highs, while less than half the market was trading above its 50-day moving average, noted technical analyst Andrew Adams, in a note for Saut Strategy.

That makes it “premature to assume the bear market is definitely over; yet the better response lately at least allows us to take a few more chances buying stocks now that the winds are picking up,” he wrote.

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