Stocks Recover Quickly From April Lows

Stocks reversed course in April, with the S&P Composite 1500 declining 4.3%.  Among its components, the S&P 500 lost 4.1%; the Mid-Cap 400 fell 6.1% and the SmallCap 600 dropped 5.7%.

The month began with a sell-off that took the S&P 1500 down 5.6% through April 19.  The market then reversed course, mostly on optimism about first quarter earnings reports; but it gave back some of the gains in the last two trading sessions of the month, on renewed concerns about high interest rates.  So far in May, the rally has resumed, sparked by the April jobs report which showed moderating gains in employment, wages.  and hours worked.

The charts of the S&P 500 and Mid-Cap 400 look similar to the Composite 1500’s uptrend.  However, the SmallCap 600 has been rangebound YTD.

The twenty largest stocks by market capitalization outperformed the broader market once again.  According to my estimates, these stocks posted an average return of –3.1% in the quarter and, with their 40.1% market weighting,  contributed –1.25 percentage points (PP) of the S&P 1500’s 4.31% loss.

Returns among the 20 megacaps ranged from GOOGL’s 7.9% advance to the declines of 11.4% in META and 12.9% in HD. Except for the gains in GOOGL, TSLA (up 4.3%), PG (up 0.6%) and LLY (up 0.4%), the other 16 stocks in the top 20 posted losses.

The remaining 1,580 stocks, by inference, delivered a market-cap weighted loss of 5.1%%. and, with their 59.9% market weighting, delivered 3.1 PP of the S&P 1500’s 4.3% decline.

Sectors.  The largest contributor to the S&P 1500’s April sell-off was Info Tech, which posted an 5.4% decline and accounted for 0.7 PP of the Index’s 4.3% loss.  This was followed by Health Care (-5.2%,
-0.6 PP), Consumer Discretionary (-4.9%,-0.4 PP) Financials (-4.5%,-0.4 PP), and Industrials (-4.1%, -0.4 PP).

Utilities led the sectors with a 1.6% gain.  Real Estate posted the greatest loss: -8.0%.

Technicals.  With the May rebound, the Index has broken its initial downtrend and has now rallied to just below its March 28 high.  If it breaks above that high, the correction could be over.  Alternatively, if the Index fails to exceed its March 28 high, it could form a double-top from which it might resume its downtrend.  It could also become rangebound.

If the market enters the next phase of its correction (of the rally that began from the October 2023 bottom), Fibonacci retracement analysis suggests that the S&P Composite 1500 could fall to between 1031 and 1093.  That would represent a decline of 7.7%-12.9% from its May 10 level.

Fade Stocks, Lean Into Bonds.  With stocks having rebounded sharply over the past few weeks, the market has recovered nearly all of what it lost in the March 28-April 19 sell-off.  The market is within a whisker of its March 28 high.  A move decisively above that level would be clear evidence that the correction is over.  On the other hand, a failure to break through the March 28 high, would be a sign of a “double top”, which would raise the likelihood of a renewed sell-off that could conceivably take stocks below the April 19 low.  Stocks could also remain rangebound between the April 19 low and March 28 high.

With more signs that the economy is slowing and the recent moderation in key commodity prices, such as oil, it seems more likely at this time that inflation will recede from its recent spike, which would raise the probability of a Fed rate cut and lower across the board interest rates for the balance of the year.  The stock market may be happy to see lower rates, but if that is accompanied by slower economic growth, that may not be a sufficient catalyst for an upside move, leaving stocks rangebound.

May 15, 2024

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

© 2015-2024 by Stephen P. Percoco, Lark Research.   All rights reserved.

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