The stock market is ‘vulnerable to good news’ and a 10% to 12% rally, says this strategist


Emphasize the positive, they say. And why not, as we spend Monday with stocks on the rise amid hopes of easing U.S. tariffs on China.

Of course, optimism is a difficult task these days, with the US economy slowing, COVID still unfinished (hopefully the monkey’s smallpox will pass quickly) and Russian boots still on the ground in Ukraine. Like the S&P 500 SPX Index,
+ 0.01%
Investors, who move dangerously close to a bear market, remain understandably divided between buying the dip and selling the rip.

This is not to say that some are not making calls in the background.

Last week, we heard from technician Tom DeMark, who, after naming the COVID-19 fund in 2020, predicted that a “shocking rally” was coming our way when inflationary drivers – energy and raw materials– they are beginning to reach their peak.

In this optimistic line is ours call of the day of Mr Blonde of the Stuck in the Middle blog, who says overselling conditions are “leaving markets vulnerable to some good news”.

“An accurate catalyst is not always easy to identify, but Mr Blonde sees inflation worsening, interest rate markets are calming down as more aggressive scenarios are being removed. of the Fed, “writes Mr.

He expects a concentration of relief to occur over the next four to six weeks, and on his risk scale (1 to 10, the worst), it is a 2 to 4 move for him. “It reflects the view that major equity indices may rise by 10% to 12% and still be on a clear downward trend, so risk / reward has changed a bit.”

Mr. Blonde’s chart below summarizes the S&P 500’s declines over 2 years, with not only unprecedented 20% setbacks, but also possible ones outside of the major economic recession. In his view, equity markets have already met the minimum criteria for a cyclical bearish market, with a price around 80% probability of a “normal” recession.

@mrblonde_macro

“In short, significant damage that has already been done and being more bearish today than it was 6 months ago is probably inadequate, even if the correction is to continue,” he said.

Elsewhere, the Nasdaq Composite COMP points out.
-0.30%,
mature to ease, as it has fallen by 20% for 7 consecutive weeks, has recovered 50% of its rally since the lows of March 2020 and its long-term valuation has returned to the previous average of COVID, among other factors.

@mrblonde_macro

Then there’s the abundance of stories of “thick bear markets” in the media, a mere reflection of market sentiment. While reluctant to rely on any signs of sentiment, he notes that over the past 30 years, equally bearish attitudes have led to a rise in stock prices four or six weeks later.

His measure of sentiment is in addition to the standardized two-year Investor Intelligence and American Individual Investor Association surveys. And sure there are false positives here, but “the 30-year historical probability of higher prices in 4-6 weeks is hard to fight,” he says.

@mrblonde_macro

More evidence that there is a turning point ahead: a recent survey of Bank of America fund managers showing managers with the highest cash balances in 20 years, in addition to the recent capitulation among retailers . Citing Goldman Sachs, Blonde said they appeared to have sold 50% of what they bought in 2020-2021.

However, the deep capitulation eludes, he says, noting that his own preferred measure has not yet breached a negative 2.5%. Energy, utilities, insurance and commodities are still standing, although the last sector just started selling last week.

@mrblonde_macro

In general, Mr Blonde believes that we are probably experiencing the worst momentum of inflation, “and if the market begins to believe this, it can eliminate the most aggressive scenarios and act as a positive development”. It is not facilitated by the fact that the Fed has “put all the chips of its policy on the latest indicator of all,” inflation.

Read the full post here.

The buzz

Beijing has extended home stay orders for workers and students and ordered more mass trials as COVID cases increase.

On his tour of Asia, President Joe Biden said an American recession was not inevitable and said the United States would defend Taiwan in the event of China’s aggression. Elsewhere, Russia has been pushing its offensive in eastern Ukraine.

U.S. officials are cautious over a smallpox outbreak of the monkey, with one case in the United States and several in Europe, with experts pointing to sex in two radishes in Spain and Belgium.

After a two-year absence, the World Economic Forum in Davos, Switzerland, is back, with many pressing issues that the rich are trying to solve. Addressing the people (practically, of course), the President of Ukraine, Vlodomir Zelenskyy, called for “maximum” sanctions on Russia for the brutal invasion of his country.

Atlanta Fed Chairman Raphael Bostic and Kansas City Fed Chairman Esther George will speak at the events Monday. The U.S. data calendar is empty, but the week will bring us the minutes of the last Fed meeting on Wednesday and its preferred inflation indicator on Friday.

The markets

Uncredited

YM00 share futures,
+ 0.98%

ES00,
+ 1.03%

NQ00,
+ 0.83%
are pushing more, along with TMUBMUSD10Y bond yields,
2.825%

TMUBMUSD02Y,
2.616%,
and CL00 oil prices,
+ 0.84%
they are also up. And with the highest risk appetite, the DXY dollar,
-0.97%
is at the bottom. Cryptocurrencies are stabilizing and the stablecoin Luna has received a boost as investors have been burning their currencies.

The tickers
Random readings

A dull opening for the new Downton Abbey film may be proof that older women are still wary after COVID.

As a couple and their 19 dogs escaped from a war-torn Ukrainian city.

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