Bear trap?

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The past week wan’t good.

The end of a four-week winning streak is flustering some market participants as stock index futures remain in the red this morning (see movement below). While the S&P 500 has climbed 15% since its low at the beginning of the summer, it is still 11% lower over the course of 2022. The sentiment is causing fewer investors to call a complete market bottom, though there are still plenty of believers that feel the latest setback will prove to be more of a speed bump than serious turbulence.

“We’re bumping up against the moving average and that is a really convenient place for this to pause,” said Jeff Buchbinder, chief equity strategist at LPL Financial. “Frankly, we think the market has gotten a little bit ahead of itself in the very short term and needs to digest these gains. If the S&P can break its 200-day and hold, that’s when you probably get a lot more people in this market.”

In the coming week, investors will get another chance to see if the summer rally has legs. Earnings from tech names such as Salesforce (CRM) and Nvidia (NVDA), as well as discount stores like Dollar General (DG) and Dollar Tree (DLTR), will provide the latest clues about the health of the overall economy. The release of the Personal Consumption Expenditures Price Index – the Fed’s preferred inflation gauge – and Jerome Powell’s speech at Jackson Hole on Friday are also big events on the economic calendar.

Bear trap? This stock market rally echoes bear market moves going back to the onset of the Great Depression, according to BofA Securities. The average S&P 500 gain in 43 bear market rallies of more than 10% going back to 1929 is 17.2% over 39 trading days, while in this case, it is up 17.4% in 41 days, making it a “textbook” example. This time around, 30% of the S&P’s gain is due to just four stocks – Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) and Tesla (TSLA) – noted strategist Michael Hartnett, adding that another risk for bulls is that whether the “Fed knows it or not, they’re nowhere near done.”


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