Recent stock action could worry bulls. The S&P 500’s initial rally on Thursday to new three-month highs fizzled out during the session. The “peak inflation rally” faded.
Early Friday futures are firmer again, but inevitably some observers are still wary of the recent rally.
“Obviously, a bear market rally and a sustained recovery are similar at the outset. We need to see consolidation to herald the end of the year-to-date bear market,” said Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank.
The good news for the bulls is that this is a Tom Jones rally, as in his famous song: “It’s not unknown.”
In particular, there is nothing superlative about the rebound in the market, particularly the Nasdaq, from its mid-June bottom, suggests Bespoke Investment Group.
“The 20% rally/fall threshold is most commonly used to define bull and bear markets… The Nasdaq Composite hit the 20% rally level on the closing basis [on Wednesday]which ended the bear market for the index that began on November 19, 2021,” Bespoke wrote in a note.
“What is most striking about the Nasdaq bear market that just ended is how average it was. From peak to bottom, the Nasdaq fell 33.7% over 209 calendar days from November 19, 2021 to June 16, 2022. The average bear market since 1970 has taken the index down 35.5% over 201 calendar days,” adds Bespoke.
Source: Bespoke Investment Group
However, technical factors can be a red flag, at least in the short term. The 14-day relative strength index for S&P 500 futures was just above 75 as of Friday morning, according to CMC Markets, suggesting the underlying market is in overbought territory. Similarly, the RSI for Apple AAPL, +1.44%, the most heavily weighted stock in the S&P 500, was 74.
Meanwhile, Nicholas Colas, co-founder of DataTrek Research, notes that the CBOE Vix VIX’s recent move down -4.70% to its long-term moving average of 20, usually a sign of calmer markets, has not been accompanied by expectations of decreasing correlations between equity sectors.
High correlations between sectors such as large-cap technology, communications services, consumer discretionary, financials and healthcare are usually a sign of a tight market.
Source: DataTrek
“The VIX closing at 20 today promises something that stocks haven’t really delivered yet, namely a healthy decoupling of sector price action from the broader market,” says Colas.
“All year we’ve had consistent advice to consider buying stocks when the VIX hits around 36 (2 standard deviations from the mean) and lifting as it approaches 20. We are now at the latter point. As optimistic as we remain, stocks appear stretched here,” he concludes.
markets
S&P 500 Futures ES00, +0.86%, up 0.5% to 4,233 and Nasdaq 100 Futures NQ00, +1.25%, up 0.6% to 13,393. Dollar index DXY, +0.65%, rose 0.3% to 105.35 and the move pressured Gold GC00, +0.32%, which fell 0.3% to $1,802 an ounce. US Crude Oil Futures CL.1, -2.11% up 0.2% to $94.57 a barrel and Bitcoin BTCUSD, -0.88%, down 0.3% to $24,131.
The Buzz
A wave of Chinese companies including PetroChina PTR, -2.65%, China Life Insurance LFC, -2.80% and Sinopec SHI, -2.55% have confirmed their intention to delist from the New York Stock Exchange.
Illumina ILMN, -8.67%, is down 15% premarket after the gene sequencing company posted a second-quarter loss and downgraded its full-year outlook in a report issued after the market close on Thursday .
Easing inflation fears were highlighted by Bank of America data showing the longest weekly streak of investor outflows from TIPS funds since April 2020.
Pound USDGBP, +0.57%, is the biggest underperformer in forex trading, slipping 0.5% against the dollar after data showed the UK economy contracted 0.1% in the second quarter.
The University of Michigan consumer sentiment survey is scheduled for release at 10:00 a.m. EST.
The House of Representatives is scheduled to vote on the Anti-Inflation Act, the bill passed by the Senate that focuses on climate change and prescription drug prices, and also increases corporate taxes.
President Donald Trump’s legal team has until 3:00 p.m. Eastern time to appeal the Justice Department’s request for the warrant’s release.
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“The health of the consumer balance sheet is an important consideration in determining the severity of an economic slowdown,” says Mizuho Securities. In that regard, the news is pretty good. “The bullish case for the state of the consumer is based on significant deleveraging in the consumer sector, leaving debt to disposable income at a 20-year low.”
Source: Mizuho Securities top ticker
Here were the most active stock tickers on MarketWatch as of 6 a.m. Eastern.
ticker | security name |
AMC, +1.81% | AMC entertainment |
GME, +4.03% | GameStop |
TSLA, +2.34% | Tesla |
BBBY, +8.18% | bed bath beyond |
NO, +0.65% | no |
AAPL, +1.44% | Apple |
BABA, -0.89% | Alibaba |
AMZN, +0.16% | Amazon |
RIVN, +0.65% | Rivian |
BNGO, +4.59% | bionano genomics |
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