Rest assured, there is still hope for the stock market

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New York
CNN Business

Huge back-to-back market rallies last week may seem like a distant memory to investors now that stocks have slid over the past four days. Shares have risen slightly so far on Tuesday.

Concerns about inflation — and the increased likelihood of even bigger interest rate hikes from the Federal Reserve — are once again spooking Wall Street and driving long-term bond yields higher.

Recession fears are back with a vengeance after stark comments on the global economy from JPMorgan Chase (JPM) CEO Jamie Dimon and the International Monetary Fund over the past two days.

Anxiety is at a fever pitch as major U.S. companies prepare to release their third-quarter results and perhaps give a glimpse of what they expect for the fourth quarter and 2023.

The continued rise in the US dollar could dampen the earnings of blue-chip multinationals. And few see an end in sight for the greenback rally.

“Federal Reserve policy will continue to support the U.S. dollar as tightening is likely to continue with no pivot to easing until material evidence of labor market weakness emerges or inflation returns much further. close to the goal,” said UBS Asset Management strategists Evan Brown and Lucas Kawa. a report on Tuesday.

It is therefore reasonable to wonder if the market has even more room to go down before finally reaching a long-awaited, but seemingly elusive bottom. The S&P 500 and the Nasdaq both hit fresh 52-week lows on Tuesday, and the Dow isn’t far off either.

But investors shouldn’t cavalierly dismiss last week’s strong market gains, even as the bears appear to be regaining control.

History shows that when stocks enjoy such dramatic gains as last Monday and Tuesday, it could be a sign that a bear market bottom may soon be approaching. The S&P 500 jumped 5.7% combined over the two days.

According to a Tweeter from Charles Schwab’s chief investment strategist, Liz Ann Sonders, who shows data dating back to 1960, the S&P 500 was higher six months later eleven out of fourteen times after the days when the S&P 500 saw consecutive rallies of more than 2.5%.

This included three instances from late 2008 when market volatility was at its peak during the global financial crisis.

Another report from Bespoke Investment Group shows stocks doing even better in the 12 months after two huge days. The S&P 500 is up nearly 15% year on year after back-to-back massive rallies, compared to normal historic gains of just 9%.

Yet large market swings show how nervous investors are. The CNN Business Fear & Greed Index, which examines the VIX Volatility Gauge (VIX) and six other measures of market sentiment, is at Extreme Fear levels.

But when investors are so generally gloomy, it often presents good long-term buying opportunities.

Louis Navellier, chairman of Navellier & Associates, noted in a report that last week’s market rally was due in part to bearish investors rushing to buy stocks to close out short positions, or downside bets. of the market.

“This short hedging rally that we saw the first two days of October is a big deal. Short hedging rallies are how markets reverse,” he said, noting that stocks “ went from oversold last week to slightly overbought.

So it’s not a huge surprise to see the market ease and return some of the gains from early last week. But it’s also worth noting that the S&P 500 is still slightly higher than its Sept. 30 close, despite recent losses. In other words, investors would have done better not to budge.

Indrani De, head of global investment research at FTSE Russell, warns that investors should not overreact to daily market movements. You could miss rallies like last week if you constantly try to buy only when you think the market has bottomed and sell when things look bleak.

De conceded that “in times of high economic uncertainty…markets will remain in a regime of high volatility.” But she urged investors to look past the bumps.

“It’s not about timing the market,” De said. “It’s time in the market. Its very important.

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