U.S. stocks have recovered much of their losses from the first half of the year, but the three main indices plunged this week amid renewed fears of a Federal Reserve rate hike, and there are signs that most of the bear market rally is already underway behind us, said analysts at Citigroup.
According to strategists at Citi Research, the current bear market rally is nearly the length of an average bear market upleg, and sentiment has already improved as much as is typically seen 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 just gets too bearish,” strategists at Citi Research, led by Dirk Willer, chief executive and head of emerging markets strategy, wrote in a statement Thursday. “Basically, many bear market rallies are driven by hope that the Fed will come to the rescue. The current one is no different as the Fed’s pivotal narrative has been a key catalyst.”
In particular, the chart below shows that the AAII bull-bear indicator, one of the most closely watched investor sentiment surveys, is almost back to levels where bear market rallies peak, with expectations that stock prices will rise over the next six months will rise. up 1.2 percentage points to 33.3% in the week of August 15, while bearish sentiment rose 0.5 percentage points to 37.2%.
SOURCE: CITI RESEARCH, BLOOMBERG
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 benefit from a rally, normalized almost as much as in the median bear market rally (see chart below ). ), said Citi Research. The Index may be an indicator of investor sentiment and volatility.
SOURCE: CITI RESEARCH, BLOOMBERG
Federal Reserve officials agreed in July that it was necessary to raise its benchmark interest rate high enough to slow the economy to combat high inflation, while raising concerns that they could tighten monetary policy more than necessary According to the minutes of the Federal Reserve Open Market Committee meeting of July 26-27 were released on Wednesday.
See: Powell to say to Jackson Hole that the recession will not stop the Fed’s fight against high inflation
Following the release of meeting minutes, Federal Reserve Bank of St. Louis President James Bullard said he was leaning towards another big 75 basis point rate hike at the central bank’s September meeting. Meanwhile, Richmond Fed President Tom Barkin said the Fed will “do whatever is necessary” to push inflation back towards its 2% target, according to a Bloomberg report, while Portal reported that Barkin said the efforts the Fed would not have to be “catastrophic”.
See: Stop misinterpreting the Fed: it doesn’t get cold feet when it comes to battling inflation
According to Citi Research, the bear market rally refers to a rebound of at least 10% that occurs between the top and the bottom. “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 new lows are not subsequently made),” strategists wrote.
The S&P 500 SPX, -1.29%, is up 15.4% from its 52-week low of 3666.77 on June 16, while the Dow Jones Industrial Average DJIA, -0.86%, is up 12. Gained 9% and the NASDAQ Composite COMP, -2.01%, is up 19.4% from its mid-June lows, according to Dow Jones Market Data. Overall, Citigroup noted that three indices have rallied 17% in the past 42 trading days since June 16.
US stocks ended the week significantly lower. The Dow Jones Industrial Average DJIA, -0.86%, fell 292.30 points, or 0.9%, to close at 33,706.74. . The S&P 500 SPX, -1.29%, fell 55.26 points, or 1.3%, to close at 4,228.48. The Nasdaq Composite COMP, -2.01%, fell 260.13 points, or 2.0%, to 12,705.22.