Hope jumps forever, even during a bear market. Just do not make the mistake of making your hopes too much.
Yes, it’s hard to describe another week of losses as hopeful. That
Dow Jones Industrial Average
dipped 0.2%, the
fell 0.9%, and the
fell 1.6 per cent. However, the market showed more resilience than one might have expected. After closing close to the lowest on Monday and Tuesday, S&P turned big losses to small on Wednesday and Thursday before closing 1.9% on Friday.
Market action was primarily driven by concerns that the Federal Reserve would become even more aggressive in bringing inflation down. The chances of a full-point rate hike rose to more than 90% on Wednesday, after the June consumer price index rose 9.1% from a year earlier.
By the end of the day, the market had already begun to beat those expectations, and Fed Governor Christopher Waller’s comment on Thursday that the market “came ahead of itself” pushed them down even more. As of Friday, the chances of a full-rate rate hike had dropped to 31%.
It’s hard to get too excited, especially in the middle of a bear market. This is especially true considering that the S&P 500 has had many chances to rally, and has missed them all. Investor sentiment, for example, has been dire recently, with the American Association of Individual Investors’ sentiment survey showing that the percentage of self-identified bears was 41.1 points higher than the number of bulls in the week ending June 22nd.
Normally it would be a sign that the market was ready to rise, but it has not been able to. Now there are more signs of panic – more than 500 analyst earnings and price target downgrades for the week ending July 7th. Since the financial crisis, it has typically been a sign of a bottom, according to Sentiment Trader data.
And the earnings season would be a good time for the market to find its foothold. Everyone knows that profits will be uninspiring – heck, even analysts have finally acknowledged it – and there are likely to be cuts in guidance as well. Still, Deutsche Bank’s Binky Chadha notes that the market rises three quarters of the time during the earnings season and that whether it rises or not has very little to do with the average size of beats, or whether companies lower their own forecasts.
“[It] It is unlikely that the market will sell further alone due to weaker earnings or cuts in guidance, as these are now widely expected, ”explains Chadha. “We think it will take evidence of corporate risk aversion beyond just weaker numbers, especially large cost-saving measures or changes in capital expenditure plans.”
Maybe the earnings season will be fine. But lost in the middle of last week’s clashes is the fact that the S&P 500 fell for five consecutive days until July 14, even though it was fighting back from more serious losses. Historically, it has been a sign of further short-term losses when the index’s 200-day moving average falls and the S&P 500 itself is out of its low levels, Sentiment Trader’s Dean Christians notes. Under such circumstances, the index has fallen by a median of 1.8% over the next two months, falling 56% of the time.
“The same setups as what we see now have preceded falling stock prices across short and medium-term time frames,” Christians writes. “[We] must remember that the trend is not our friend. ”
Not yet at least.
Write to Ben Levisohn at Ben.Levisohn@barrons.com