U.S. stocks have recouped a significant proportion of their losses in the first half of the year, but the three major stock indexes tumbled this week on resurgence of fears about interest rate hikes by the Federal Reserve, and there are signs that most of of the bear market recovery is already behind us, analysts at Citigroup said.
According to strategists at Citi Research, the current bear market rally is almost in line with the duration of an average bear market recovery, and sentiment has already improved as much as it normally does during regular bear market rallies, which would suggest a possible end of the rally relatively soon.
“Bear market rallies are often driven by sentiment as the market becomes very bearish,” Citi Research strategists led by Dirk Willer, managing director and head of emerging markets strategy, wrote in a note Thursday. . “More fundamentally, many bear market rallies are driven by the hope that the Fed will come to the rescue. The current one is no different, as the Fed’s pivot narrative has been an important catalyst.”
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In particular, the chart below shows that the AAII bull-bear indicator, one of the closely watched investor opinion polls, is almost back to the levels where bear market highs peak, with expectations that prices stocks rose over the next six months increasing 1.2 percentage points to 33.3% in the week to Aug. 15, while bearish sentiment rose 0.5 percentage points to 37.2%.
Meanwhile, the SKEW index for the S&P 500, which measures the difference between the cost of derivatives that protect against market downturns and the right to benefit from a rally, has normalized nearly as much as the median bear market rally (see chart below), said Citi Research. The index can be a proxy for investor sentiment and volatility.
Federal Reserve officials agreed in July that it was necessary to raise its benchmark interest rate high enough to slow the economy and fight high inflation, while expressing concern that they might end up tightening monetary policy more than necessary, according to the minutes of the Federal Reserve. The July 26-27 Open Market Committee meeting was released on Wednesday.
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After the release of the minutes of the meeting, the chairman of the St. Louis, James Bullard, said he was leaning towards another big rate hike of 75 basis points at the central bank meeting in September. Meanwhile, Richmond Fed Chairman Tom Barkin said the Fed “will do whatever it takes” to bring inflation back to its 2% target, according to a Bloomberg report, while Reuters quoted Barkin saying the results of the Fed’s efforts need not be “calamitous.”
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According to Citi Research, a bear market rally refers to a jump of 10% or more that occurs between peak and trough. “If a new low is made after a 10% rally, the next rally of more than 10% is a separate rally from the bear market (or a bull market if no new low is made later),” the strategists wrote. .
The S&P 500 SPX,
up 15.4% from a 52-week low of 3,666.77 on June 16, while the Dow Jones Industrial Average DJIA,
up 12.9%, and the Nasdaq Composite COMP,
jumped 19.4% from the mid-June low, according to Dow Jones Market Data. In total, Citigroup noted that three indices have gained 17% in the 42 trading days since June 16.
US stocks ended the week sharply lower. The Dow Jones Industrial Average DJIA,
dropped 292.30 points, or 0.9%, to end at 33,706.74. . The S&P 500 SPX,
dropped 55.26 points, or 1.3%, to end at 4,228.48. The Nasdaq Composite COMP,
declined 260.13 points, or 2.0%, to 12,705.22.