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Will FTSE 100 and S&P 500 stocks reverse following rebalancing boost?

Quarter-end rebalancing and a fading financial boost are raising the possibility of another bearish reversal for global stock markets.

​Market rebounds into month end

Stock markets have been on the rise as we close in on the month-end, with the huge month-long sell-off seen from mid-February being partially eroded by a welcome period of optimism.

This recent period has been dominated by announcements of financial aid which genuinely could make a difference to the economy, following a largely sceptical market reaction to the less relevant monetary action taken by the Federal Reserve (Fed) and co.

US House of Representatives speaker Nancy Pelosi has been bringing up the prospect of another stimulus package, highlighting the possibility that this stimulus phase could continue. However, these announcements are likely to become less frequent and smaller in nature.

Once we do see this stimulus phase fade, it can leave markets once again exposed to the reality of a looming global recession and global shutdowns that could dominate 2020.

Those following the coronavirus case numbers will note that the battle to drive down the peak is starting to work following actions to limit movement and thus transmission of the virus. However, until we see a cure or vaccine for Covid-19, these draconian measures could be a regular feature around the world.

Make no mistake about it, while the social distancing and lockdown measures are necessary to save lives, they are hugely detrimental from an economic perspective. That means they are likely to continue putting downward pressure on stocks for as long as they last.

Rebalancing could be driving gains

As we close in on the monthend, many are looking for a reason for any further gains. One reason why we are likely to have seen stock market gains comes from the rebalancing the money managers will need to embark upon as the quarter draws to a close.

Funds will often provide a specific asset allocation which is expected to remain steady. One such allocation could be 60% equity, and 40% bonds. Given the huge market moves over the course of the first quarter (Q1), the rebalancing of these portfolios could be very significant in size.

Bearing in mind that there are trillions of dollars in such funds, we are looking at hundreds of billions going into stocks ahead of month end. Some of that could happen today (31 March 2020), yet much of it would have taken place in the period leading up to this deadline.

With that in mind, there is a distinct possibility that a significant amount of support we have seen for equities could disappear when April comes around.

FTSE 100 technical analysis

From a UK perspective, the possibility of a market reversal is relatively clear given the breakdown below 5473 support on Friday.

This breaks the recent uptrend and signals a likely retracement phase coming into play rather than a next leg higher. That retracement seems to be working out as things stand, with price rallying into, but not above, the 76.4% Fibonacci retracement level.

As the price declines, we need to see a break below the 551 swing low to confirm the bearish outlook for this index.

S&P 500 technical analysis

Out of the three major US indices, the S&P 500 has largely underperformed the likes of the Dow Jones and Nasdaq. For the most part this is due to tech outperformance, and the feeling that Dow giants will mostly provide good buying opportunities before long.

The S&P 500 index has a greater exposure to a whole host of companies that could be hit especially hard over the coming months.

The S&P 500 chart shows a clear inability to break through the 2644 peak today, with the index subsequently creating a short-term double top formation.

That break below 2606 is bringing about a short-term bearish picture which could turn into a wider downturn if this holds into April.

A break up through 2644 would bring about a short-term bullish continuation signal, yet that recent failure to break that level does start to highlight how a more bearish picture could build as the rebalancing and stimulus boost draws to an end.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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