(Bloomberg) Fears of an all-out U.S.-Chinese trade war rocked equities last week after President Donald Trump set the stage with tweeted complaints about China, followed by talks that didn’t produce a deal but avoided a complete breakdown.
While the S&P 500 fell the most in a week since December and the Shanghai Composite dropped 4.5%, U.S. shares also showed resilience.
“Bullish intraday reversals atop key support strongly suggest that the week-long 2% pullback is over and the historic first half surge in stocks is poised to resume,” Evercore technical strategist Rich Ross wrote in a note May 10 entitled, “Rational Exuberance.” The S&P 500’s next target is 3,000, he said. That would be a 4.1% gain from Friday’s close of 2,881.40.
Last Monday, a drop of 1.6% melted in the afternoon and the gauge ended down 0.5%. On Tuesday, a 2.4% decline moderated to 1.7% at the close. On Friday, the S&P dropped as much as 1.6% before ending 0.4% higher.
That doesn’t mean markets have clarity on trade, so at least on that front the signals aren’t all pointing north for stocks.
Trump said it “would be wise for China to act now,” as deal terms “will become far worse for them” if negotiations continue into his potential second term. Meanwhile, Vice Premier Liu set China’s conditions.
Aside from the trade impact, the rally is getting extended -- to the 91st percentile on length and 96th percentile on size -- so a pullback is “overdue,” Deutsche Bank AG strategists led by Binky Chadha said in a May 10 note. Chadha is the most bullish of U.S. equity strategists tracked by Bloomberg, with a target of 3,250 on the S&P 500 for 2019.
Stocks have further to fall, so “standing aside is a good idea right now,” Miller Tabak & Co. strategist Matt Maley said in a note on Saturday. He sees the 50-day average of 2,861 as the first support. Then there’s 2,715 and 2,648, the Fibonacci 38.2% and 50% retracements of the December-to-April rally.
But Evercore’s Ross sees blue skies, saying there’s a good technical setup for more than just the S&P 500.
A “bullish hammer” off the 50-day moving average of the Nasdaq 100 exchange-traded fund, known by its ticker symbol QQQ, “strongly suggests that trend remains strong and intact,” he wrote. The Philadelphia Semiconductor Index and KBW Bank Index both had “textbook reversals” off their 50-day moving averages and he expects them to gain.
Even the market’s volatility benchmark, the VIX, displayed a bullish setup, according to Ross. That index rose as high as 23.38 intraday on May 8 before ending the week at 16.04.
“VIX had neared levels consistent with 2,600” on the S&P 500, he said. “Fear overdone.”