Yahoo Finance

Key Takeaways

• The S&P 500 rose more than 3% on Monday, putting the index on track to close above a technical level that one analyst says is the biggest test of the current stock rally's longevity.

• If the S&P 500 closes above its 200-day moving average, it will be both psychologically significant and a catalyst for more demand from institutional trend-following investors, says LPL Financial's Adam Turnquist.

• Turnquist warns that, historically, drawdowns like the one that hit in April often come in pairs.

Stocks extended their monthlong rebound on Monday after the U.S. and China rolled back some tariffs and agreed to discuss a comprehensive trade agreement.

U.S. officials on Monday said they would lower tariffs on Chinese goods to 30% from 145%, while China said it would slash U.S. tariffs to 10% from 125%. The deal leaves in place tariffs President Donald Trump imposed in February as punishment for China’s alleged role in America’s fentanyl crisis, along with levies on steel, aluminum, and cars.

The S&P 500 on Monday was on track to close comfortably above its pre-“Liberation Day” level. The effective U.S. tariff rate, however, remains well above where it was just six weeks ago, leading some to wonder whether the tariff relief rally of the last month is sustainable.

200-Day Moving Average Is the S&P 500's Next Test

“Stocks have staged an impressive recovery since the April 8 closing low,” wrote Adam Turnquist, chief technical strategist at LPL Financial, in a research note on Monday. (April 9 was the day President Trump paused for 90 days the “reciprocal” tariffs that prompted one of the sharpest sell-offs in recent memory.) However, Turnquist estimates that this rally’s biggest test will be whether the S&P 500 can overtake its 200-day moving average at about 5,750.

“A breakout above this area of overhead resistance would not only raise the probability of a sustained recovery, but also potentially open the door for institutional demand entering the market via renewed interest from trend-following funds,” said Turnquist.

The S&P 500 was up more than 3% in recent trading on Monday at 5,835. In its most bullish scenario, LPL Financial expects the S&P 500 to finish the year between 6,100 and 6,200, which would represent a full-year return of between 3.7% and 5.4%.

History Says Another Pullback Is Likely

But history tells us there could be more pullbacks along the way, according to Turnquist. Over the past 75 years, any time the S&P 500 has retreated more than 15% from a record high, it has experienced an additional pullback of between 18% and 19%, on average, within the following 12 months.