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The stock market is “vulnerable to good news” and a 10% to 12% rally, says this strategist

Emphasize the positive, they say. And why not, as we cruise into Monday’s bullish stock prices on hopes of an easing of US tariffs on China.

Admittedly, optimism is great these days as the US economy is slowing, COVID isn’t over yet (let’s hope monkeypox passes quickly) and Russian boots are still down in Ukraine. Like the S&P 500 Index SPX,
+0.01%
teetering dangerously close to a bear market, investors understandably remain torn between buying the dip and selling the rip.

That doesn’t mean some calls for the bottom don’t stand a chance.

Last week we heard from technician Tom DeMark, who after Calling the COVID low in 2020, predicted that a “shocking rally” would be upon us as the drivers of inflation – energy and commodities – peak.

In this optimistic streak is ours call of the day of the Stuck in the Middle Blogs Mr Blonde saying oversold conditions “make markets vulnerable to some good news”.

“An exact catalyst is not always easy to identify, but Mr. Blonde sees that inflation dynamics have passed their worst point and rates markets are calming as the most hawkish Fed scenarios are removed,” writes Mr. Blonde.

He expects an easing rally to take place over the next four to six weeks and on his risk scale (1 to 10 – worst) he sees it as a move from 2 to 4. “It reflects the view that major stock indices may be up 10% to 12% and are still on a clear downtrend so the risk/reward trade-off has shifted somewhat.”

Mr. Blonde’s chart below summarizes the S&P 500’s rolling 2-year declines, with pullbacks of 20% not only not being outrageous, but also possible outside of major economic downturns. In his view, equity markets have already met the minimum criteria for a cyclical bear market, pricing in around an 80% chance of a “normal” recession.

@mrblonde_macro

“Bottom line, it’s probably unreasonable that significant damage has already been done and is more bearish today than it was 6 months ago, even if the correction has yet to go further,” he said.

Elsewhere he refers to the Nasdaq Composite COMP,
-0.30%,
ripe for relief as it is down 20% over 7 straight weeks, retraced 50% of its rally from March 2020 lows and its forward rating has returned to pre-COVID averages, among other things.

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@mrblonde_macro

Then there is the plethora of “snarling bear market” stories in the media – a simple reflection of market sentiment. Though he’s reluctant to rely on sentiment signals, he notes that over the past 30 years, similarly declining attitudes have led to higher stock prices four to six weeks later.

Its sentiment gauge adds polls from Investors Intelligence and the American Association of Individual Investors, normalized over rolling biennial periods. And sure there are false positive risks here, but “the 30-year historical probability of higher prices in 4-6 weeks is hard to combat,” he says.

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@mrblonde_macro

More evidence that a tipping point is coming: a recent Bank of America survey of fund managers reveals managers with the highest cash balances in 20 years, as well as recent capitulation among retailers. Citing Goldman Sachs, Mr Blonde said they appear to have sold 50% of their purchases in 2020-2021.

But he’s avoiding deep capitulation, he says, noting that his own favorite metric still hasn’t crossed the negative 2.5%. Energy, utilities, insurance and staples still stand in the way, although the latter sector only started selling last week.

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@mrblonde_macro

Overall, Mr Blonde believes we’re probably past the worst of inflation dynamics, “and if the market starts to think so, it can remove the more hawkish scenarios and act as a positive development.” What doesn’t make it easy is the fact that the Fed has “put all its policy levers on the most lagging indicator of all,” inflation.

Read the full post here.

The Buzz

Beijing has extended stay-at-home orders for workers and students and ordered more mass testing as COVID cases surge.

During his Asian tour, President Joe Biden said a US recession is not inevitable and America will defend Taiwan in the event of Chinese aggression. Elsewhere, Russia is stepping up its offensive in eastern Ukraine.

US officials are expressing caution over a monkeypox outbreak with one case in the US and several in Europe, with experts pointing to sex at two raves in Spain and Belgium.

After a two-year absence, the World Economic Forum is back in Davos, Switzerland, with many pressing issues for the super-rich to try to solve. Speaking to the crowd (practically, of course), Ukrainian President Vlodomir Zelenskyy urged “maximum” sanctions against Russia for the brutal invasion of his country.

Atlanta Fed President Raphael Bostic and Kansas City Fed President Esther George will both speak at events Monday. The US data calendar is blank, but the week brings us minutes from the last Fed meeting on Wednesday and their favorite indicator of inflation on Friday.

The markets
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Uncredited

stock futures YM00,
+1.03%

ES00,
+1.10%

NQ00,
+0.94%
pushing higher, along with TMUBMUSD10Y bond yields,
2.832%

TMUBMUSD02Y,
2,620%,
and oil prices CL00,
+0.92%
are also above. And with higher risk appetite, the dollar DXY,
-1.02%
is down the line across the board. Cryptocurrencies are stabilizing and stablecoin Luna has gotten a boost as investors burned their coins.

The tickers
Random Reading

A lackluster opening for new Downton Abbey movie could be proof that older women are still cautious after COVID.

Like a couple and their 19 dogs fled a war-torn town in Ukraine.

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https://www.marketwatch.com/story/the-stock-market-is-vulnerable-to-good-news-and-a-10-to-12-rally-says-this-observer-11653304088?rss=1&siteid=rss The stock market is “vulnerable to good news” and a 10% to 12% rally, says this strategist

Brian Lowry

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