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S&P On a Knife's Edge: Bull Case vs. Bear Case

S&P On a Knife’s Edge: Bull Case vs. Bear Case

by

Justin Nugent

March 3, 2023
at 7:23 PM

7 trading days. That’s how long it’ll be before the next major stock market test. That date: The March 14th CPI, released at 8:30AM EST. Many of the street’s brightest minds and top fund managers are at odds about what that date will mean for the stock market.

In One Corner: The Bulls

Technically speaking, bulls have had it right throughout 2023. The S&P 500 is higher by roughly 6% to start the year. And no one has been a more prominent bull than Fundstrat managing partner, Tom Lee.

In December of 2020, in the midst of the COVID-19 Pandemic, after a painful September, October and November, Tom Lee made a bold call — 2021 would be the year of the “everything rally.”

When the smoke cleared, Tom Lee was right. 2021 gave way to a broad, “everything rally” that performed especially well for big tech and energy — two sectors that Lee had previously identified as potential leaders.

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In the Opposing Corner: The Bears

After a roaring 2021, the S&P 500 had reached all-time high after all time high. But one analyst saw the problems on the horizon. That man:

“The biggest bear on the street,” Morgan Stanley CIO Mike Wilson.

In January of 2022, with the rally raging on and the S&P 500 at all-time highs, Mike Wilson issued a grave warning — get ready for the drop. Mike Wilson made his case for the coming bear market in three parts:

First, according to Wilson, stock market valuations were already stretched to a level not seen since the dot-com bubble. Second, the market was not taking into account the upcoming rate hikes and balance sheet reductions of the Fed, which (third) would put pressure on the earnings potential of stocks. By the end of 2022, it was clear: Mike Wilson was right. 2022 was one of the toughest years for stocks on record.

Now, in 2023, these two stock market heavyweights who have adequately predicted past years are back — and they’ve got opposing predictions.

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Tom Lee’s March Call: Upcoming 8-Week Rally

In December of 2022, Fundstrat Managing Partner Tom Lee called for an equity rally in January to kick off the new year. That’s exactly what he got — bulls took off running. Growth names that had been beaten down throughout 2022 were given a breath of new life. Tesla experienced a 100% rally in share price.

Everywhere you looked — from NVIDIA to PLTR, stocks were rallying. By the end of the month, when the smoke cleared, January of 2023 was determined to have been the best January for the S&P 500 since 2019, rising 6.2% overall. The Nasdaq performed even better — it’s best January since the year 2000, rising 10.7%.

February was a little different. The S&P 500 fell by 2.6%, and the Nasdaq by 1.1%, spurred lower in part by above-expectation inflation data. But this didn’t discourage the big bull on the street, Tom Lee, who said that February’s unit labor costs should be the last of the hot inflation data.

In short: Tom Lee expects March 14th to show a continued meaningful decline in inflation, paving the way for markets to rally.

On March 3rd, Lee doubled-down on his bullish thesis, releasing a new note to clients. In the note, Lee said:

“The softness in equities since mid-February has not yet reversed, but we believe the window is soon emerging where this softness will give way to an 8-week period where equities will rally strongly,”

But there’s another analyst who disagrees about the impact of the March 14th CPI.

Mike Wilson’s March Call: S&P Takes 20% Drop to Low 3000’s

At various points throughout 2023, Mike Wilson has remained firm on his call that the bear market isn’t over yet. Despite January of 2023 being a solid month of gains, Wilson told investors not to be fooled by what he believed was a bear market rally. Now, after a lackluster February, Wilson is back with a more concise set of predictions.

“The earnings recession is far from finished.”

On March 1st, Mike Wilson took to Bloomberg to clarify two points. First, Wilson believes it’s possible that the S&P 500 could fall 20% from current levels. At the time he said that, that would indicate a drop to around 3150. This would be predicated by earnings. Wilson said,

“If earnings come down in a way that we think is appropriate with the path that we see, and we don’t get a reset on price, then we’ll just say it’s over. That could be here, that could be down 5 percent. That could be down 20 percent. Our work suggests it’s gonna be down close to 20% from here — so low 3000’s.

We can confidently say the equity risk premium and the multiples that are being reflected do not reflect the earnings risk that we see. The reason why that’s happening is two-fold. Number one the economy is better.”

“Three months ago most institutional clients thought that a recession was very likely, now they’re thinking it’s not so likely anymore.”

Wilson continued,

“And then of course this liquidity change, where global money supply growth has been offsetting what the Fed has been trying to do with tightening financial conditions, and it’s created sort of an ebullient environment for asset prices. That’s not sustainable in our view.”

To confirm his bearish, Fed and earnings based thesis, Mike Wilson pointed to the same date as Tom Lee — March 14th.

Conclusion: Remain Disciplined — Trade the Price Action

At Market Rebellion, we make trades based on data. Whether we’re looking at a possible breakout or breakdown in price action, or studying a repeat UOA hit, we never leap into a trade blind. We always wait for a trigger.

What is a trigger-level in trading: A trigger-level is the level at which you trade against. Often based around a key level of support or resistance, trigger-levels tell you when to enter and exit trades. If a certain level has previously been a point of support, and a stock breaks below it, that can be a sign that the stock is heading meaningfully lower. Likewise, if a particular area of a stock has previously been a point of resistance, and a stock breaks above it, that can be a sign that the stock is heading meaningfully higher.

When price action crosses through that predetermined level, it can be a sign to enter the trade. However, if after entering, you notice that the stock crosses back through the level, it can be an equally powerful sign that your trade thesis has been invalidated, and that you should close the trade to mitigate any potential losses.

In this case, a bull and a bear are at odds regarding the next big move in the SPX. We could take a side in the debate, but the safer approach would be to wait. Wait and see who ends up being right, and ride on the coattails of their momentum using key trigger levels in the SPX. The four most well known levels in the SPX can be found below.

The chart above features four areas that have been key battlegrounds between bears and bulls over the past several months. Notice: Price action currently is placed smack-dab in between the two levels. You could make a guess at which direction it’s going to go — or you could wait.

Bears will want to see the SPX cross below that crucial 3900 zone, which has acted as support 3 times, and resistance 5 times since the month of May. If it does, that would likely trigger an onslaught of bearish selling and short pressure, which could drive the market back down to its October low of sub-3600 — the sight of a previous triple bottom. The zone between 3900 and 3600 would become a potent trading area for bears.

On the other hand, bulls will want to see price action break out above 4200. If it does, it would put the S&P 500 on route to the August highs of roughly 4300 — which has acted as resistance 4 times since April of 2022. The zone between 4200 and 4300 could become its own bullish trading zone.

And if the market were to break above or below the top or bottom levels of this chart? That would likely trigger another wave of momentum. Remember, buying begets buying, and selling begets selling.

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Market Rebellion’s team of licensed CMT’s spend hours poring through the charts each and every day, hunting for breakouts and breakdowns just like this. Our expert chartists work with former floor traders and professional options traders to supply Market Rebels with powerful trade ideas unlike those found anywhere else. Designed to capitalize on momentum and technical analysis, every single trade idea comes equipped with technical levels, entry and exit triggers, and specific option contracts you can use to exploit market momentum.

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