Federal Reserve Chair Jerome Powell’s dovish intimations this week. combined with softer consumer price index (CPI) data for April, have unleashed Wall Street’s animal spirits, pushing the major U.S. stock market indices to record highs.

It begs the question: how durable is this equity rally? Let’s turn to key technical and fundamental indicators for guidance.

Technical analysis is used to forecast future price movements based on historical price and volume data. It operates on the premise that past market trends can provide insights into future price movements, and that these patterns can be identified and exploited to make informed trading decisions.

Unlike fundamental analysis, which focuses on examining a company’s financial statements, earnings, and economic indicators, technical analysis relies solely on the study of price and volume data.

At the core of technical trading is the use of charts to visualize price movements over time. Practitioners of technical analysis, often referred to as chartists, analyze these charts to identify recurring patterns and trends that can help predict future prices.

Chartists believe that market psychology, reflected in price movements, tends to repeat itself, and therefore, by studying historical patterns, they can anticipate future market behavior.

Some investors place great validity in technical indicators. Others dismiss technical trading as voodoo. I think a glib dismissal of technical trading is unfair, but I see the point of that criticism if it’s only charts that an investor relies on. I prefer taking a hybrid approach that combines technical and fundamental data.

I’m also mindful of the fact that algorithms increasingly dominate trading on Wall Street, especially as artificial intelligence becomes more pervasive. While technical indicators provide valuable insights into market trends and potential entry/exit points, algorithms leverage this information to automate trading decisions and execute trades more efficiently in the stock market.

There’s an old saying on Wall Street: Don’t fight the Fed. I suggest a corollary: Don’t fight the bots.

Below, I examine what both schools of thought, technical and fundamental, can teach us today. First, let’s step into the world where charts are scrutinized like ancient scrolls.

The technical side…

Moving averages are key technical indicators. A moving average helps smooth out price data by creating a constantly updated average price. A rising moving average indicates that the security or index is in an uptrend, while a declining moving average indicates a downtrend. The shorter the moving average, the sooner you’ll see an actual change in the market.

The 10-Year U.S. Treasury Yield has slipped in recent days to hover at 4.51%, below its 20, 50-, and 200-day moving averages:

The easing of this benchmark is a positive trend for stocks; It reflects the consensus that the Fed will maintain an accommodative stance this year and interest rates are on their way down. When yields go down, equities often go up (and vice versa).

The CBOE Volatility Index (VIX), aka “fear index,” has been falling and sits below all three of its major moving averages, indicating a decline of stress and uncertainty in the markets:

The VIX hovers below 13, which is a hopeful sign. Wall Street is regaining the confidence that it temporarily lost when inflation readings last week came in hotter than expected.

The SPDR S&P 500 ETF Trust (SPY) has soared well past all three of its major moving averages, indicating an acceleration of momentum:

The S&P 500 on Wednesday, May 15 closed above 5,300, an all-time high.

The New York Stock Exchange Advance/Decline line (NYAD) also has been rising, indicating greater breadth, albeit with a slight dip in recent days as the large caps take charge in the wake of solid first quarter 2024 earnings results:

The NYAD shows the number of advancing stocks minus the number of declining stocks. When major indices such as the S&P 500 are rising, a rising NYAD confirms the uptrend (and, of course, vice versa).

The fundamental side…

Meanwhile, the U.S. economy and corporate earnings are showing surprising resilience.

First quarter outcomes for the S&P 500, coupled with promising company guidance, have bolstered confidence in the trajectory of full-year earnings, which are expected to surpass year-over-year growth of 10%, according to FactSet.

In a favorable omen for the economy and consumer spending, retailing bellwether Walmart (NYSE: WMT) reported Q1 earnings and revenue on Wednesday that crushed consensus expectations.

As I’ve just explained, the technical and fundamental indicators tell us that the long-term prognosis for stocks is positive. But there’s a caveat. Stocks have gotten pricey and they’re vulnerable to bad news (such as, say, a resurgence of inflation).

Price-to-earnings ratios and other valuation gauges are generally regarded as fundamental indicators, used to assess the intrinsic value of stocks. These valuations have gotten stretched. However, if we do get a pullback over the near term, I suggest using it as a chance to buy the stocks on your “wish list” at a better price.

On Thursday, the main U.S. stock market indices took a breather from their run-up and closed lower as follows:

• DJIA: -0.10%
• S&P 500: -0.21%
• NASDAQ: -0.26%
• Russell 2000: -0.63%

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John Persinos is the editorial director of Investing Daily.

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