"Terrible Week" Ends With Strong Dead Cat Bounce As Bear Market Marches On

Wall Street is ready to close the books on yet another ugly, chaotic week, the sixth week in a row – the longest negative stretch since 2008 – that has seen the S&P slide, in fact, the S&P has seen weekly gains in just 4 of the past 14 weeks.

Granted today’s relief rally means that we narrowly avoided the worst week for stocks since Jan 21, but it was touch and go there for a while there with the S&P yesterday literally tagging a 20% bear market drop when spoos slumped as low as 3,855 – the trigger for a bear market from the S&P’s Jan ATH, and new 52 week lows on the Nasdaq soaring to 1,271, the most since the January crash…

… before bouncing hard today, to close above 4,000.

And so, as Oanda’s Edward Moya puts it, “a terrible week ends on a positive note” as investors took comfort from a round of Fed speak that suggested financial markets won’t have to price in even more tightening of financial conditions over the next couple of FOMC decisions. Fed’s Daly supported the idea of sticking with 50 basis-point rate hikes at the next two meetings, even as Powell yesterday reiterated his support for raising rates at the June and July policy meetings, while reassuring that bigger hikes are off the table for now, but obviously they would do more if the data comes in worse than expected.  

To be sure, with stocks massively oversold, it was only a matter of time before we got a powerful bounce, and today was the day when hope that the selling pressure and market capitulation had peaked combined with optimism that China’s COVID situation is not worsening…

… and sent every sector…

… and every major index sharply higher, led by the Nasdaq which has been hammered the most in recent months.

Could it be that stocks finally bottomed yesterday? That is the $6.4 trillion question (roughly how much market cap US stocks have lost since March), and as we discussed in “”Are We There Yet”: Has The Market Hit Peak Capitulation“, it’s probably too early to call it the end of the bear market. Still, some Wall Street strategists were hopeful:

• “Much speculative froth has already been removed from the market,” wrote Mark Haefele, chief investment officer at UBS Global Wealth Management. “So, we advise against a hasty exit. Our central scenario is also that a recession will be avoided over the next 12 months. However, investors should continue to brace for high levels of volatility.”
• “We’ve certainly revalued the stock market in a big way,” Jim Paulsen, chief investment strategist at Leuthold Group, told Bloomberg Television and Radio. “Really great fear on Main Street, on Wall Street, combined with, I think, ongoing good fundamentals — including strong balance-sheets in the household sector, the corporate sector and the banking industry — I think that’s a ‘dynamite’ combination you have to buy on.”
• “Investor sentiment is at extreme levels and technical indicators are universally negative,” said Mark Hackett, chief of investment research at Nationwide. “This reflects the degree of pessimism embedded in the market, setting the stage for a bounce from oversold levels, which could be expected in the coming weeks.”
• “There was a sense of calm in the markets, but again without any fundamental news to suggest this is perhaps the bottom,” wrote Fawad Razaqzada, an analyst at City Index and FOREX.com. “Stocks have struggled to sustain any recovery attempts as traders have been quick to take profit on rebounds amid a bearish macro backdrop.”

Still, putting today’s rally in context, keep in mind that this may well be just another bear market rally. And speaking of bear markets, well there’s plenty of those around the world today.

A part of today’s reversal may have to do with rates, which after tumbling in recent days on speculation of an imminent recession, moved higher and closed at 2.94%, up from yesterday’s 2.82% low (after hitting a multi-year high of 3.20% earlier this week).

While stocks have had a tough time rising in 2022, the same can not be said of crude oil, gasoline or diesel, and crude prices again rallied hard on optimism over China’s COVID situation, sending both gasoline and diesel to new all time highs.

As Oanda notes, “the crude demand outlook is not going to fall apart as the US enters peak driving season and as European air travel remains solid. The focus for much of the week has been on the EU’s inability to reach agreement on a Russian oil ban, which suggests we won’t have an immediate shock to the oil market.”

In FX, after relentless gains over the past year pushed the dollar to the highest level since the panic March 2020 scramble for dollar, we observed some modest dollar weakness which also helped support the move higher across all commodities, including oil prices. ​ Some traders believe we may have seen a short-term peak in the dollar, but that might only provide temporary relief.

There was some much needed stability in cryptos which after suffering their worst week in years as the infamous Terra and Luna algo-stables imploded, leading to tens of billions in losses, finally managed to find a modest bid in a day when not a single “stablecoin” cratered to zero.

But while cryptos finally had an up day, the same can not be said for gold, which extended its recent plunge and closed at the lowest level since February and is now red for the year.