It’s Wall Street’s version of an inquiry that might be fielded by a parent on a long car trip: Are we there yet?
In this case, the there refers to the bottom of a stock market that had seen year-to-date gains for the Dow Jones Industrial Average DJIA, +0.97% and the S&P 500 index SPX, +1.09% briefly erased this week and pushed the Nasdaq Composite Index COMP, +2.01% into a correction, usually defined as a drop of at least 10% from a recent high, for the first time in about two years.
Presently, there isn’t a consensus for what lies ahead for U.S. equities, which had been punished in an October that had proved to be as painful as historical statistics foretold.
However, Wednesday’s action, a spillover from Tuesday’s rally, might imply that the market may be out of the woods. The Dow was trading up by more than 400 points at the intraday peak, while the S&P 500 was in ascendancy, and the Nasdaq was powering higher as well (and out of correction, if you are an avid CNBC watcher, even if that isn’t possible).
Upbeat quarterly results from Facebook Inc. FB, +3.81% which put aside fear of further woes in so-called FANG names, which have been key to the overall markets stretch of repeated all-time highs, and strong private-sector labor-market data have helped to support a buying mood — for now.
So, here’s a brief rundown of the bull and bear cases for the next phase of the market.
The bull case
Tom Lee, managing partner at Fundstrat Global Advisors, in a Wednesday research note said one reason for the two-day rally that is under way is conditions in the market that had placed many of the stocks on U.S. exchanges in oversold positions. “This makes sense — we are massively oversold. A 10% decline in 20 days is a 2 standard deviation event,” he wrote.
Lee pointed to a number of so-called oversold conditions that have prevailed amid this October selloff, including breaches below the closely followed moving averages at 50 days and 200 days. However, he has recommended that investors should be buying — aggressively at this point.
“The prevalence of these 4 oversold conditions (50D/200D for S&P 500/Russell 2000) is a major tactical signal and we would be aggressive buyers.”
Lee said he sees the market rallying 10% or better by the end of 2018.
Similarly, Tom McClellan, publisher of the McClellan Market Report and a high-profile chart technician, told MarketWatch that the recent downdraft has been a function of seasonal volatility associated with October and not a more significant upending of a 10-year bull market. He also said he views stocks as oversold and said he remains bullish on the stock-market outlook.
Another bull, DWS’s chief investment officer, David Bianco, said that markets corrected because investors had reassessed equity valuations and earnings expectations. “Why the correction? Investors reset 2019 S&P EPS growth from 10% to 5%,” Bianco wrote in a Tuesday research note. He said corrections usually are caused by recessions, and he doesn’t see one of those in the cards. “When corrections aren’t followed by recessions, the average S&P gain six months later is 18.5%, since 1957,” he wrote.
The bear case
MarketWatch has outlined the case for why things could get worse before they get better, at least in the near term. But to recap, a number of chart watchers say that more work needs to be done to repair the downturn that began in early October before their faith is restored in the bull-market run.
Jeff deGraaf, chairman of research firm Renaissance Macro Research, said he wants to see better market breadth and volume. “A sigh of relief fell over the [S]treet as the losing streak for equities abated near support at 2,600 on the SPX. We’d classify the rebound as ‘uninspiring,’ ” he said, referencing specifically Tuesday’s drive higher.
A prominent technical analyst, Ralph Acampora, appeared to agree with DeGraaf and to believe that sufficient destruction was done to the market to warrant a better and more consistent turn higher.
Bruce Bittles, chief investment strategist at Baird, in a Wednesday afternoon note said that this two-day rally merits caution: “The scale of this week’s stock market move (the S&P 500 is 5% above its late-Monday low) is more a function of the volatility seen in October than evidence, at this point, of improving trends.”
“While index-level strength off of Monday’s lows is encouraging, we maintain a cautious view. We can use historical tendencies to describe a likely path forward. At the same time, we cannot be so beholden to these expectations that we turn a blind eye to emerging realities,” he wrote.
As always, however, only time will tell how things ultimately play out. But it would appear sure to be a bumpy ride with the midterm elections ahead, more rate increases expected from the Federal Reserve and nagging questions about the health of the global economy. In other words, all factors that helped to drive this market lower in the first place.
