In previous posts this week, I described how there is a generally a brief summer rally that can start at any time if seasonal market patterns hold this year. (Now whether there is a Summer rally this year, and/or it turns out to be a bear market rally or brief bounce, depends on a lot of geopolitical & supply chain issues that are random factors at this point).
There have been three catalysts for bulls' attempt to find footing this week as the market consolidates at just above the level at which the S&P would enter a bear market:
- Biden suggesting early this week that the (inflationary) tariffs regime may be lifted,
- the release of the Fed meeting minutes Wednesday that confirmed no rate hikes > 1/2% are being considered, and
- strong earnings reports in the past 2 days from some retailers after an initially depressing set of earnings reports from Walmart & Target sent markets tumbling
It's important to note here that the week long rally I'm describing has been selective. In US equities, industrial stocks, pharmaceuticals, materials and other real economy sectors have had a run of 5 days of gains in a row. Tech/growth stocks may pause in their correction and catch a lift from the consolidation in these other sectors, or they may not. But there has also appeared a new bout of so-called “dip buying” that appears to be favoring global assets, including foreign stocks & bonds after analysts cut ratings on “developed markets” as the EU & emerging markets have developed into deep value plays since being dragged into the US selloff.
With that context,
Global equity funds saw their biggest inflows in 10 weeks, led by US stocks, as cheaper valuations lured buyers after a steep selloff on recession fears.
Investors added about $20 billion to global stocks in the week to May 25, led by inflows into the US, according to Bank of America Corp.’s note citing EPFR Global data. Cash led the inflows among asset classes with about $28 billion, signaling market participants continue to search for havens. Bond fund outflows reached $5.8 billion.
Equities have staged a recovery this week, with the US and European indexes heading for their biggest weekly advance since mid-March as investors bought the dip after strong declines. Citigroup Inc. strategists this week recommended stepping back into stocks, particularly in Europe and emerging markets, on their appealing valuations, while cutting their recommendation on US stocks to neutral
Still, strategists remain divided on whether the selloff has found a bottom, with the likes of Morgan Stanley and Bank of America saying that there may be more losses to come, while BlackRock cut developed market stocks to neutral this week.
“Summer rally bandwagon is growing,” Bank of America strategists led by Michael Hartnett wrote in the note. “We fade rallies, but not in a rush.”
Assets including US 30-year Treasuries, Chinese and German stocks, US banks and technology, European industrials as well as consumer stocks in the US, Europe and China are among the most oversold assets relative to their 200-day moving average and “vulnerable to tradable bounce,” the strategists said.
Disclosures:
I am currently mostly allocated to commodities & commodity related cyclical stocks, including foreign miners & shipping stocks and have recently added significant Latin American exposure. I have almost zero allocation to tech/growth at this time.
In my portffolios, my positioning reflects my belief that the overall market indexes will continue to fall due to inflated assets, despite any short term rallies but I do constantly trade near term events.
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