Stock market bulls are poking their heads over the parapet, declaring the declines in 2022 sales as indexes extend a pullback from June lows, while skeptics still see little evidence of more than a bear market pullback.
S&P 500 SPX,
was down 1.2% near 3,950 in afternoon trade Friday, but headed for a 2.3% weekly gain after trading as high as 4,012.44 and topping the 4,000 threshold for the first time since June 9.
As the old saying goes, such disagreements are what make a market. Here’s a look at where the bulls and bears — and those in between — stand right now.
Bullish on the breadth
Market breadth expansion — a measure of how many stocks in an index participate in a move — “confirms that the 2022 ‘bottom’ is in,” Tom Lee of Fundstrat Global Advisors wrote in a note Thursday night.
“We are beginning to see strengthening internals for the equity markets, including key leadership improvements from tech ($QQQ) and small-caps ($IWM) and measures such as advance/decline lines,” Lee wrote.
Other positives include signs that inflation risks are easing as gasoline prices tank and food prices fall, while second-quarter earnings so far have been better than feared and companies are reporting an easing of “supply chain” problems, Lee said. Also, a number of formerly bullish Wall Street strategists have capitulated and lowered their year-end S&P 500 targets, while institutional investors are arguably near “maximum pessimism” based on a Bank of America survey that showed gross market exposure at 2008 levels .
The question of whether bulls have fully capitulated, exhausting the pool of potential sellers and setting the stage for a lasting bounce, remains a matter of debate.
Futures positioning by speculators is “incredibly bearish,” said Barry Bannister, who told CNBC on Friday that a summer emergency rally could take the S&P 500 to 4,200 or 4,300. Bannister, who has described the S&P 500 as being in a “secular” bear market earlier this week, reiterated his call for a 10% pullback from June lows capable of taking the index into the low 4,000s in a relief rally led by cyclical. growth stocks.
On Friday, he questioned whether the S&P 500 would take out June lows, arguing that he expects a typical mid-cycle recession rather than a full-blown recession. The S&P 500’s fall to its June low, in real terms, was not far outside the typical decline that accompanies a recession, he said.
Doubters, meanwhile, argue that it’s still far too early to say for sure.
Morgan Stanley’s Mike Wilson, who correctly predicted the sell-off, claimed earlier this week that the market’s “countertrend rally” may continue, but that the bear market is far from over, even if the US economy avoids recession, according to Bloomberg. Wilson has previously warned that a full-blown recession could take the S&P 500 as low as 3,000.
Skeptics also remain unconvinced that there has been sufficient capitulation by bulls to clear the way for a sustained rally.
“With such tremendous bearishness embedded in today’s stock prices, some are suggesting that now is the time to add significant equity exposure. To be sure, markets may very well be oversold technically, and we believe the long-term outlook for equity returns has improved markedly since the start of the year, but that’s very different from saying the markets have bottomed, said Dan Suzuki, deputy managing director of investments at Richard Bernstein Advisors, in a Friday note.
Suzuki offered a laundry list of reasons why investors likely haven’t capitulated enough to ensure a market bottom is in place.
These include valuations that remain high but significantly down from their peak; Wall Street strategists still recommend a 54.6% equity allocation, just slightly below the long-term median of 56.2%; Wall Street buy ratings on stocks at 57%, nearly the highest in a decade; and volatility readings that remain below levels that typically signal a bottom; and stock flows that signal investors are still buying.
Meanwhile, widespread talk of capitulation creates a paradox of its own.
“If everyone is itching to get into the market at the bottom, that probably means we’re still a long way from true capitulation,” he said.