Sell the rip
Bear market rallies can be ferocious beasts. Such was the case yesterday, with equities gaining strongly, as the S&P vaulted above the 4,000 handles, aided by both somewhat over-exuberant sentiment, in addition to options-related hedging ahead of Friday’s expiries.
I don’t think recent gains are likely to be particularly durable. The macro backdrop remains dismal and is in fact worsening as China continues to pursue a zero-covid policy, while another bout of supply chain disruption is rapidly making its way towards the western world.
Bear market rallies can be violent, and fool investors into thinking that the downtrend is over, as we saw in 2000, and in the GFC. The idea that the downtrend is over doesn’t appear true at present, as the aforementioned survey notes, with investors still expecting rate hikes rather than rate cuts, “stocks are prone to a bear rally, but ultimate lows not yet reached”.
The above SPX chart shows a few of the recent rallies which have been jumped on by sellers, with this week’s selling on Wednesday causing the largest % down day since June 2020. More red on this chart looks inevitable.
