Robert Burgess

The Stock Market Bandwagon Is Filling Up Quickly

The US stock market as measured by the MSCI USA Index just posted its best two-day performance since February, rising 1.58 percent Tuesday and 1.13 percent Wednesday. What’s notable is that the gains, in the wake of a nasty sell-off that left equities on the cusp of a correction, aren’t coming with the usual caution from prominent Wall Street strategists about “dead cat bounces.” Instead, they are expressing a remarkable sense of enthusiasm.

First, JPMorgan Chase & Co.’s all-world analyst Marko “Gandalf” Kolanovic issued a report Tuesday talking up the possibility that the October “rolling bear market” turns into a “rolling squeeze higher” into the end of the year. Then on Wednesday, Fundstrat Global Advisors’ Tom Lee — another analyst known for making exceptionally timely calls — went even further. He wrote in a research note that “the potential for a violent upside rally is substantial.” While a big part of Kolanovic’s thesis focused on fundamentals such as a likely surge in stock buybacks by companies, Lee honed in on the technicals. The percentage of stocks in the S&P 500 and Russell 2000 that are above their 50- and 200-day moving averages is “unusually low,” and that has often signaled a bottom when it has happened outside of a bear market but in a correction, reports Bloomberg News’s Kriti Gupta. As Lee points out, returns over the following three and six months — when the markets have become as “oversold” as they are now — have averaged 13 percent and 19 percent, with positive gains in eight of nine cases. Cynics might say that now would be the perfect time to sell given such unbridled optimism among strategists.

But there are signs that all those who wanted to sell have already done so. State Street Global Markets came out Wednesday with its monthly index of global institutional investor confidence. The measure has some authority because unlike survey-based gauges, it uses actual trades and covers 15 percent of the world’s tradeable assets. For October, the index dropped to 84.4, the lowest in almost six years. The index has been this low in only two other periods in the history of the series going back to 1998 — late 2012 and late 2008, and each time stocks went on to rally. Who wants to play those odds?

I would be remiss to talk about the good feelings that have suddenly permeated equities markets not only in the US but globally without mentioning China’s role. As the world’s second-largest economy, significant fiscal and monetary announcements there tend to ripple through global markets. There have been countless times in the past few years when China’s stock and bond markets looked to be in freefall only for the authorities to announce plans to stimulate the economy, bolstering risk assets worldwide. Well, it just so happens that on Wednesday a statement from a Politburo meeting chaired by President Xi Jinping said that the nation’s economic situation is changing, that downward pressure is increasing, and that the government needs to take timely steps to counter all this.