Here are the signs the bear market rally in stocks won’t last long: Citi

US stocks have recovered much of their losses from the first half of the year, but all three major indices tumbled this week on renewed fears about interest rate hikes by the Federal Reserve, 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 roughly in line with the length of an average bear market bounce, and sentiment has already improved as much as it normally does during regular bear market rallies, which would suggest a possible end to the rally relatively soon.

“Bear market rallies are often sentiment driven as the market turns too 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 pivot narrative has been a major catalyst.”

In particular, the graph below shows that the AAII bull-bear indicator, one of the most followed investor confidence surveysis almost back to levels where bear market rallies peak, with share prices expected to rise over the next six months, rising 1.2 percentage points to 33.3% in the week of the 15 while bearish sentiment increased 0.5 percentage point to 37.2%

SOURCE: CITI INVESTIGATION, BLOOMBERG

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 profit from a rally, normalized about as much as it does in the mid-market rally. bearish (see chart below). ), Citi Research said. The index can be an indicator of investor sentiment and volatility.

SOURCE: CITI INVESTIGATION, BLOOMBERG

Federal Reserve officials agreed in July that it was necessary to move your benchmark interest rate high enough to slow the economy to combat high inflation, while raising concerns that they may tighten monetary policy stance more than necessary, according to minutes of the July 26-27 Federal Open Market Committee meeting released on Monday. Wednesday.

Watch: Powell will tell Jackson Hole recession won’t stop Fed’s fight against high inflation

After the publication of the minutes of the meeting, the president of the Federal Reserve Bank of St. Louis James Bullard said he is leaning towards another big rate hike of 75 basis points. at the central bank’s September meeting. Meanwhile, Richmond Fed President Tom Barkin said the Fed will “do whatever it takes” to bring inflation back to its 2% target, according to a Bloomberg reportweather Reuters reported than Barkin saying that the Fed’s efforts need not be “dire”.

Watch: Stop Misreading the Fed: It’s Not Repenting for Fighting Inflation to the Ground

According to Citi Research, bear market rally refers to a 10% or greater rebound that takes place between the peak and the trough. “If a new low is made after a 10% rally, the next rally of more than 10% is a separate bear market rally (or a bull market, if no new lows are made subsequently),” the strategists wrote. .

The S&P 500SPX,
-1.29%
rose 15.4% from its 52-week low of 3,666.77 on June 16, while the Dow Jones Industrial Average DJIA,
-0.86%
rallied 12.9%, and the NASDAQ Composite COMP,
-2.01%
it jumped 19.4% from its lows in mid-June, according to Dow Jones Market Data. In total, 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,
-0.86%
it fell 292.30 points, or 0.9%, to finish at 33,706.74. . The S&P 500SPX,
-1.29%
it fell 55.26 points, or 1.3%, to finish at 4,228.48. The Nasdaq Composite COMP,
-2.01%
it decreased 260.13 points, or 2.0%, to 12,705.22.

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