Still A Bear Market Rally? Or, Is The Bull Back?

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Is it nonetheless a “bear market rally?” After an enormous surge from the lows following the Russian invasion of Ukraine, Mike Wilson from Morgan Stanley thinks so. To wit:

“The primary quarter was one of the worst on document for the collective efficiency of shares and bonds, with the latter worse than the previous. This is smart provided that investor concern targeted extra on the ‘Hearth’ (inflation and the Fed) than the ‘Ice’ (progress slowdown). Nevertheless, that leaves us extra constructive on bonds than shares over the close to time period as progress issues take heart stage – therefore our doubling down on a defensive bias.

The rally was predictable from a technical perspective, however it was at all times a bear market rally in our view, and now we predict the bear market rally is over.” – Morgan Stanley

There are actually some technical causes to counsel the bear market rally could also be full. As proven, the market swung from a deeply oversold to an overbought situation in a really quick interval. Such is normally indicative of bear market rallies.

Bear Market Rally, Still A Bear Market Rally? Or, Is The Bull Back?

Including to Mike’s “bearish case” is that liquidity is reversing, and the Fed is about to drastically tighten financial coverage. The latter level, when mixed with already excessive ranges of inflation, is nearly sure to trigger an issue.

Trying again traditionally, excessive ranges of inflation mixed with Fed tightening of financial coverage led to both a recession, bear market, or a disaster.

Throughout these durations, bear market rallies have been fairly widespread. As is at all times the case, the market does an excellent job of luring traders again in at precisely the flawed time.

Nevertheless, earlier than you soar on the “promote all the things and pile into money” prepare, there are a number of indicators that the bull market rally is probably not finished simply but.

Did Hedge Funds Go Too Far?

Only in the near past, Goldman Sachs introduced a contrarian view of the present market. Throughout the first couple of months of 2022, hedge funds went into liquidation mode. Per Goldman Sachs, regardless of the current rally out there, there was web promoting of equities.

As we mentioned in “Bear Squeeze,” the rally from the March lows had all of the earmarks of a “short-squeeze.”

That short-covering appeared in essentially the most closely shorted names and primarily in most of the “meme” shares that have been hit the toughest with the sell-off.

Nevertheless, with hedge funds now “offsides” by way of their allocations, underweight equities, and obese money, that has traditionally been a contrarian indicator as famous by BofA.

“What we’ve got discovered is that consensus Wall Avenue strategists are a really dependable contrarian indicator. When they’re telling you to dial down your fairness publicity and improve your allocation to money, that’s really web bullish.”

Moreover, retail investor sentiment stays unfavorable which can be one other “contrarian sign.”

Moreover, with sentiment and positioning unfavorable, the current thrust within the McClellan Oscillator provides to the contrarian argument for the bear market rally.

“That is solely the third time the indicator has made such an excessive spherical journey over the previous 5 years. The opposite two coincided with vital bottoms.” – Sentiment Dealer

The contrarian view of Mike Wilson’s bear market rally can be countered by the month of April which has a historic tendency of optimistic efficiency.

Whereas there are a lot of logical components supporting a extra bearish view of the market at the moment, watch out getting overly bearish and not using a technical affirmation.

It’s straightforward to get trapped on the flawed aspect of the commerce.

Confirming A Bear Market Rally, Or Not.

So, is that this a bear market rally, or a return to a extra bullish market?

The trustworthy reply is we don’t know, and within the quick time period, all we are able to depend on is our technical indicators to information our danger administration technique.

During the last six months, the market has made little or no progress after its surge from the March 2020 lows.

Should you had purchased into the market in early September, you’re at about the identical degree 6-months later. Nevertheless, the volatility was nauseating, to say the least.

The issue for traders at the moment is that the broad buying and selling vary now makes danger administration very tough. To verify a “bear market” is resuming, we might want to break the “Russian Invasion” lows. Nevertheless, to substantiate a return of a “bull market,” would require a breakout to all-time highs.

An ordinary Fibonacci extension can provide us clues as to breakout, or breakdown, ranges, and subsequent targets.

With such a large buying and selling vary and no clear course for the markets, we proceed to suggest following fundamental danger administration protocols.