Roth analysis: Has volatility created a trigger warning for stocks?

Investing.com - The financial markets have experienced a roller coaster ride of late, prompting analysts at Roth to issue a technical strategy update.

Despite ending last week down just 0.04%, the S&P 500's minor dip feels like a victory considering Monday’s significant 3% plunge. In contrast, the Nasdaq 100 managed to finish the week higher, but the mixed signals in the broader market have left investors on edge.

The S&P 500 is currently positioned above its 200-day moving average (DMA) but remains below its 50 DMA. Approximately 66% of the S&P 500 constituents are trading above their long-term average, signaling some underlying strength.

Market Dynamics and Key Indicators

The analysts note that for stocks to regain stability, the S&P 500 needs to close above the 5400/5460 area. On a positive note, the cumulative breadth indicator remains robust, and credit markets are displaying unusual tranquility. Concerns would arise if liquidity starts to weaken, but so far, many charts exhibit strong foundational support, even though last week's bounce wasn't sufficient to move prices above critical resistance levels.

In the near term, the equity market finds itself in a troublesome position. While long-term trends remain favorable, short-term indicators aren't oversold enough to suggest a tradeable low is imminent. Analysts conjecture that managers should remain defensive, as the current volatility stems partly from dramatic shifts in the currency markets. Historically, the equity market requires about two months to fully absorb significant forex volatility.

Tactical Trade Opportunities: Energy and Small Cap Value

Energy stocks, though currently underweighted in Roth's sector rankings, present a tactical upside opportunity. Last week, crude oil had its best performance since early March, increasing by 4.52%. Energy equities have previously demonstrated strong rallies following similar rebounds in crude oil prices. Notably, ExxonMobil (NYSE:XOM) is highlighted as an attractive large-cap pick in this sector.

Another area worth revisiting, according to Roth analysts, is Small Cap Value stocks, which have returned to key technical support levels. If the recession narrative shifts towards a 'soft landing,' these stocks could potentially act as a springboard for higher gains.

Specific bullish small-cap value stocks identified include Frontier Communications (OTC:FTRCQ) Parent Inc (NASDAQ:FYBR), John Wiley&Sons (NYSE:WLY), Service Corporation International (NYSE:SCI), Hasbro Inc (NASDAQ:HAS), Kiniksa Pharmaceuticals Ltd (NASDAQ:KNSA), Opko Health Inc (NASDAQ:OPK), Organon&Co (NYSE:OGN), Ligand Pharmaceuticals Incorporated (NASDAQ:LGND), Parsons Corp (NYSE:PSN), Pentair PLC (NYSE:PNR), Plexus Corp (NASDAQ:PLXS), Klaviyo Inc (NYSE:KVYO), Healthpeak Properties Inc (NYSE:DOC), and Cushman&Wakefield plc (NYSE:CWK).

Macro Trends and Sector Performance

Despite recent volatility, longer-term trends for the S&P 500 suggest a continuation of an uptrend. The index's recent peak of 15% above its 200 DMA was notably stretched, and the subsequent 10% pullback is viewed as a natural correction rather than a trend deterioration. However, analysts caution that this volatility often results in aftershocks, requiring continued vigilance.

Sector-wise, Industrial, Energy, Communication Services, and Financials sectors have shown resilience, each climbing back into positive territory last week. These sectors benefited from specific rallies such as a strong performance in transports, banks, and crude oil prices. On the other hand, the Technology sector, despite its previous status as a leading performer, has dropped to an underweight position, with significant declines recorded among semiconductor stocks.

Credit markets remain surprisingly calm despite the recent equity market turbulence. The true test will come if liquidity issues emerge in bond, credit, or currency markets, potentially signaling the onset of bear market conditions. In such volatile times, both upside and downside risks can be exaggerated.

A spotlight is also on the Japanese yen positioning and European markets, which, despite recent selling pressure, have not breached yet critical support levels.