Bulls and bears expected today’s rally, but few see it lasting
[ad_1]
The daily journal of Mike Santoli is CNBC’s Senior Markets Commentator. It contains ideas and statistics about markets, trends, stocks, and other market information. A fitting market bounce was likely — even if relatively few handicappers seem to have confidence that it’s the start of a trend change. Seven straight down weeks are rare, sentiment and some oversold conditions have become more extreme than they were preceding previous 5-10% bounces this year (Nasdaq 100 sank 20% below its 200-day average – deeper than any time but 2001-2002 and 2008-2009), post-options expiration weeks have been stronger as has this particular week in May ahead of Memorial Day. Bulls and bears are not surprised by the rebound. Semis, biotech, speculative tech, banks all stopped going down relative to the S & P 500 in recent weeks, a sign the rolling bear market had for now rolled beyond the most overheated, most-clobbered groups. This hole is so deep that even a 10% rally from Friday’s closing would not reverse the downtrend, or threaten April’s high. It is now up to the question of what has been discounted, in terms economic slowing and inflation, as well as whether or not the trigger to “sell the rallies”, which was pulled last week following a 5% relief rally, will be pulled again as fast. So far, that 3,800-3,900 band on the S & P 500 has continued to hold, adhering to a variety of approaches that identified it as a place the market might gather itself. This is where we find the down-20% threshold. We haven’t yet closed below this level, but the past history of drops between down-19% & down-20% has been well documented. Technically, it reaches some objectives regarding retracing but not at 40% of post-March 2020 rally. This moves the forward P/E index to a neutral 16x. Source: FactSet. Also, market-based inflation expectations are falling. This is due to the U.S. dollar dropping off recent highs while Treasury yields remain well below the recent highs. Of course, a lot of this owes to concerns over the growth outlook but suggests the market has tightened financial conditions enough to do some of the Fed’s work — perhaps, optimistically. It makes sense to have a recession scare — we usually have scares both when a recession is and isn’t imminent as the cycle ages. Although Leading Economic indicators, credit spreads and unemployment claims have shown some softening so far, they still don’t seem to be in danger of being triggered by the same wires that are always triggered just ahead of any recession. Many talk about how the stock market declines can dampen household asset value and reverse the “wealth impact”, something that the Fed seeks to prevent inflation and restrain demand. However, I believe the direct transfer mechanism to stock-market declines comes from CEO attitudes. The feedback is immediate and swift to highly equitized employees and executives. Expect a change in hiring, investment and debt capacity. It’s notable that we saw a similar decline to current levels of CEO Confidence in 1998, 2011 and 2018 – all near-misses on a recession and bear market – but only when confidence has plunged further have we been in recession. Banks have been the best performers today, after JPM’s investor meeting and Bank of America CEO comments gave some confidence in the outlook of interest income and the credit quality of borrowers. As if credit were eroding fast or the risk of an “accident”, banks trade as if they are losing money. These issues are being addressed and there is hope for some relief. The market breadth is good, with 70% of upside volume at NYSE and less on Nasdaq. Today’s high-yield credit is slightly firmer as the average effective yield for junk-debt approaches 8%. This compares to levels in late-2018, and it was well below early-2016 correction highs. VIX just below 29 is slow and non-committal. This shows a cautious tape, but it is not panicky. However, market bottoms are often marked by a lower VIX level than in the preceding downleg. So I am not one of those who believe the VIX must reach 40 or higher before markets can stabilise a little.
[ad_2]