Saikat Chatterjee & Danilo Masoni

LONDON (Reuters – After Wednesday’s U.S. Federal Reserve meeting, global equities will rebound. Several indicators based market positions and levels are signalling a recovery.

Investors have increased bets on the fact that the time of extremely low interest rates, large pools of liquidity and risk-adjusted assets has ended. Share market have suffered a severe beating. It is possible that the Fed will announce later today that it will tighten its policy by introducing rate hikes or cutting back on balance sheets.

The global stock market has lost 7.7% in 2022 so far, and is set to have its worst year ever since 1980 due to falling popularity of high-flying tech shares.

Many believe that markets have reached a temporary bottom.

Goldman Sachs (NYSE -) stated to clients that falls didn’t indicate a “danger area” and that their risk indicator models indicated that markets were nearing levels considered safe entry points for investors.

Citibank also advised investors to buy into market dips. The 18-metric analysis showed that there were fewer red flags in the U.S. than prior to the 2008 crisis, and the burst dotcom bubble.

Here are more signs that indicate a rebound:

1 OVERSOLD TERRITORY

Chartists are monitoring the relative strength (RSI) index to determine oversold conditions for U.S. indices. This is after last month’s ructions. Traditionally, a level of 30 or less is considered to indicate a selling trend and point towards a temporary bounce.

The three most important U.S. benchmarks trade below this level and the market for the has lost $3 trillion since 2018. It is now at 25.4.

“The U.S. markets look oversold now.” “I sense a rally,” said a UK trader.

Nasdaq 100 RSI https://fingfx.thomsonreuters.com/gfx/mkt/xmpjojgolvr/Nasdaq%20100%20RSI.PNG

2. EXTREME BEARS

American Association of Individual Investors (AAII), the latest sentiment survey, showed that retail investors are in a very bearish mood. This is considered to be a classic contrarian signal and it hovers near its lowest level in nearly three years.

AAII https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnwrgapq/AAII.JPG

3. TAKING PROFITS FROM SHORT

The net short position across U.S. benchmarks points to an immediate bounce. This could be triggered possibly by investors locking profits from bearish investments.

While the S&P has switched from net long to net short, Nasdaq positioning remains net short and according to Citi, the most “negatively extended”.

The bank stated that recent selling was not linked to macro data but was more sentiment driven. It also said that Nasdaq’s futures position was “one-sided” with profits levels rising rapidly, which may lead to a temporary rebound.

The futures flows picture was overall a sign of “weak conviction”, they said.

Citi Research has granted permission for this article to be reprinted. It cannot be reproduced.

US weekly flows https://fingfx.thomsonreuters.com/gfx/mkt/akpezngzlvr/US%20futures%20weekly%20flows.PNG

4/FRENZIED POTS

Option markets are also witness to the mad rush for exits. CBOE’s put-to-call ratio is at its highest level since early 2020 when the pandemic began. This suggests that investors are becoming too optimistic in the near term. Calls allow holders to purchase and put options give the ability to sell at pre-agreed prices.

putcall https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwxmkdpo/putcall.JPG