US equities have recovered much of their losses from the first half of the year, but the three major indices slumped this week as fears of interest rate hikes from the Federal Reserve resurface, and there are signs that most of the bear market rally is already behind us, Citigroup analysts said.
According to strategists at Citi Research, the current bear market rally is almost in line with the duration of an average bear market rebound, and sentiment has already improved as much as usual during regular bear market rallies, suggesting a possible relatively quick end to the rally.
“Bear market rallies are often sentiment-driven, because the market is just getting too bearish,” Citi Research strategists led by Dirk Willer, the chief executive and head of emerging markets strategy, wrote in a note Thursday. “In a more fundamental sense, many bear market rallies are driven by hopes that the Fed will come to the rescue. The current one is no different, as the Fed pivot story has been a major catalyst.”
In particular, the chart below shows that the AAII bull-bear indicator, one of the closely monitored surveys on investor sentiment, is nearing the peak of bear market rallies with stock prices expected to peak in the coming months. Six-Month, rose 1.2 percentage points to 33.3% in the week of August 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 declines and the right to profit from a rally, normalized nearly as much as the median bear market rally (see chart below). ), said Citi Research. The index can be an indicator of investor sentiment and volatility.
Federal Reserve officials agreed in July that it was necessary to raise their benchmark interest rate high enough to slow the economy to combat high inflation, while fearing that they would overturn monetary policy stance more than necessary. may tighten, according to Federal Reserve minutes. The July 26-27 Open Market Committee meeting was released on Wednesday.
To see: Powell To Tell Jackson Hole Recession Won’t Stop Fed’s Fight Against High Inflation
After the minutes of the meeting were released, James Bullard, president of the Federal Reserve Bank of St. Louis, said he is leaning toward another large 75 basis point rate hike at the central bank’s meeting in September. Meanwhile, Richmond Fed President Tom Barkin said the Fed will “do whatever it takes” to push inflation back toward its 2% target, according to a Bloomberg report, while Reuters reported that Barkin said the efforts of the Fed don’t have to be “calamic”.
To see: Stop Misinterpreting the Fed: It’s Not Getting Cold Over Inflation Wrestling
According to Citi Research, the bear market rally refers to a bounce equal to or greater than 10% that occurs between peak and trough. “If a new low is reached after a 10% rally, the next rally above 10% is a separate bear market rally (or a bull market, if no new lows are reached after that),” strategists wrote.
The S&P 500 SPX,
rose 15.4% from its 52-week low of 3666.77 on June 16, as the Dow Jones Industrial Average DJIA,
rose 12.9%, and the NASDAQ Composite COMP,
is up 19.4% since its mid-June low, according to Dow Jones Market Data. In all, Citigroup noted that three indices have seen a 17% rally in the past 42 trading days since June 16.
US stocks ended the week sharply lower. The Dow Jones Industrial Average DJIA,
fell 292.30 points, or 0.9%, to end at 33,706.74. . The S&P 500 SPX,
fell 55.26 points, or 1.3%, to end at 4,228.48. The Nasdaq Composite COMP,
fell 260.13 points, or 2.0%, to 12,705.22.