Quarter-End Rebalancing Could Spark a Stock Market Rally This Week

US STOCKS OUTLOOK:

• After a strong rebound over the past week, the S&P 500 fell 0.3% to 3,900 on Monday amid cautious sentiment
  Stocks manage to stay outside bear market territory despite today’s pullback
  Quarter-end rebalancing activity could boost shares in coming days, but gains could be short-lived

  Most read: Gold Price Prediction – Triangle Support Bias – XAU/USD Levels

  U.S. stocks had a subdued start to the week after a sharp rebound on Friday, suggesting investors remain reluctant to steadily increase their risk exposure amid weak market sentiment and worries about the economic outlook.

  At the close, the S&P 500 fell 0.3% to 3,900, but managed to stay outside bear market territory for the second straight session. The Nasdaq 100 led losses on Wall Street, down 0.90% to 11,998, dragged down by rising U.S. Treasury rates, which rose 7 basis points to 3.20%.

Despite Monday’s weak performance, the S&P 500 is likely to build on its recent recovery in the coming days, thanks to a key catalyst: a quarter-end rebalancing. To balance risk and return, pensions and mutual funds often establish targeted allocations by dividing their investments among different assets. For example, a fund might try to have a 60:30:10 portfolio of stocks, bonds, and cash.

As security prices change, the portfolio may deviate from a set mandate, prompting managers to buy and sell assets in order to restore portfolio allocation percentages to predetermined levels. Rebalancing is sometimes done on a monthly basis, although many institutions prefer to do it on a quarterly basis.

While stocks and bonds both fell during the quarter, equities significantly underperformed the broader market, suggesting that this week’s equity buying was fueled by a rebalancing that spanned the end of June, the current quarter and the first significant mid-year period. . Wall Street, however, has different estimates, but Goldman Sachs has said that net demand for U.S. equities from U.S. bonds could reach $30 billion.

In theory, rebalancing activity should support stocks through the end of the month and increase the likelihood of another strong S&P 500 rally, with weakening liquidity conditions likely to support directional moves. However, the gains are likely to be short-lived as the appetite for risk-holding wanes ahead of the next earnings season, when companies may start issuing negative earnings warnings and downgrading their outlook.

S&P 500 TECHNICAL ANALYSIS

After last week’s strong rally, the S&P 500 has managed to move out of bear market territory, but buying pressure remains weak and sentiment is fragile, a situation that could limit further progress. To be confident that the worst is over and that the recent rally is not another dead cat rally, we need to see stronger bullish momentum and a break above resistance near 4,000. If this scenario materialises, the bulls could be more daring to attack the next technical hurdle at 4060/4075. On the other hand, if the bears regain control and push prices lower, initial support lies at 3,810, followed by 3,675. On further weakness, the focus turns to channel support near 3,600.

S&P 500 TECHNICAL CHART