Stock market bulls are craning their heads over the parapet and declaring the bottoms to be the 2022 sell-off as indices extend a recovery from their June lows, while skeptics still see little sign of anything more than a bear market recovery.
The S&P 500 SPX,
tumbled 0.9% on Friday to close at 3,961.63 but rallied 2.6% weekly, its largest since the week ended June 24. It traded as high as 4,012.44, breaching the 4,000 level for the first time since June 9th.
As the old saying goes, disagreements like this make a market. Here’s a look at where the bulls and bears — and those in between — stand right now.
Bullish on breadth
Widening market breadth — a measure of how many stocks in an index participate in a move — “confirms that the ‘bottom’ is in 2022,” Fundstrat Global Advisors’ Tom Lee wrote in a note Thursday night.
“We are starting to see internals for the stock markets strengthening, including key leadership improvements from technology ($QQQ) and small-cap ($IWM) as well as actions such as advance/decline lines,” Lee wrote.
Other optimistic factors include signs that inflationary risks are easing as gasoline prices fall and food prices ease, while second-quarter earnings have so far been better than feared and companies report easing in “supply chain” issues, Lee said. Also, a number of previously optimistic Wall Street strategists have capitulated and lowered their year-end targets for the S&P 500, while institutional investors are arguably near “maximum” according to a Bank of America survey that showed gross market exposure at 2008 levels pessimism”.
Whether the bulls have fully capitulated, exhausted the pool of potential sellers and set the stage for a lasting upleg remains a matter of debate.
Futures positioning by speculators is “incredibly bearish,” said Barry Bannister, who told CNBC on Friday that a summer recovery rally could take the S&P 500 to 4,200 or 4,300. Bannister, who earlier this week described the S&P 500 as being in a “secular” bear market, had reiterated his call for a 10% rebound from the June low, sending the index into a recovery rally led by cyclicals to the lows 4k could bring growth stocks.
On Friday, he questioned whether the S&P 500 would break the June lows, arguing that he expects a typical mid-cycle bottom rather than a full-blown recession. In real terms, the S&P 500’s drop to its June low was not far from the typical drop that accompanies a recession, he said.
Meanwhile, doubters claim it is far too early to give the all-clear.
Morgan Stanley’s Mike Wilson, who correctly predicted the sell-off, argued earlier this week that while the market’s “countertrend rally” may continue, the bear market is far from over even if the US economy is in a recession, according to Bloomberg should avoid. Wilson has previously warned that a full-blown recession could send the S&P 500 as low as 3,000 points.
Skeptics are also not convinced that the bulls have capitulated enough to clear the way for a sustained rally.
“Given the immense bear market embedded in today’s share prices, some are suggesting that now is the time to add significant equity exposure. Of course, markets may very well be technically oversold, and we believe the long-term outlook for stock returns has improved significantly since the beginning of the year, but that’s very different than saying markets have bottomed,” he said Dan Suzuki. deputy chief investment officer at Richard Bernstein Advisors, in a statement Friday.
Suzuki provided a long list of reasons why investors probably haven’t capitulated enough to ensure a market bottom is reached.
These include valuations, which remain elevated, albeit well below their peak; Wall Street strategists continue to recommend an equity exposure of 54.6%, just below the long-term median of 56.2%; Wall Street’s buy ratings for stocks at 57%, nearly the highest in a decade; and volatility readings remaining below levels that typically signal a bottom; and stock flows that signal investors are still buying.
Meanwhile, the widespread talk of surrender creates a paradox of its own.
“If everyone is dying to get in at the bottom of the market, that probably means we’re a long way from true capitulation,” he said.