Investing.com -- The S&P 500 could stage a “relief rally” in the coming period, Bank of America strategists said, citing the index’s historically strong performance in early November during presidential election years.
In a Monday note, strategists noted that traditionally, the S&P 500 has shown strength in the first 10 days of November during election years, with an average return of 1.06% and a median return of 1.36%.
“The average return is the third best and the median return is the second best of any first or last 10 day period of the election year,” BofA strategist Stephen Suttmeier wrote.
He also pointed to the current oversold condition of the 3-month VIX relative to the VIX (VIX3M/VIX), which is below 1.0. This sentiment indicator, which reflects market fear, has shown similar trends before the 2020 and 2016 Presidential elections.
“This suggests taking a contrarian bullish view on the US equity market and favors a rally into year-end,” Suttmeier added.
Despite a pullback from its mid-October record high of 5878.46, the S&P 500 is maintaining a pattern that could indicate continued bullish momentum.
If the index holds above key support levels, including the rising 50-day moving average at 5703 and a Demark level at 5695, the bullish trend from July to September could remain intact. This could set the stage for potential gains, with targets at 5930 and 6180, the strategists highlighted.
Furthermore, BofA's examination of long-term price momentum, as measured by the 28-month Williams %R (WLPR), suggests that the S&P 500 is likely to remain overbought for the rest of 2024.
In the past 22 years, whenever WLPR was overbought in the first 10 months, it remained so for the entire year. Suttmeier anticipates that 2024 could follow this trend, with average and median fourth-quarter and November-December returns ranging from 4.2% to 5.5%, supporting a year-end target for the S&P 500 in the 5940s to 6070s range.
In presidential election years when monthly WLPR has been consistently overbought, the S&P 500 has also performed well in the fourth quarter and November-December, with average and median returns between 4.9% and 6.8%.
This data supports BofA's expectation for the S&P 500 to potentially reach levels between 5980s and 6150s by year-end, aligning with the bullish patterns observed from July to September.