Market signals scream buys after world stocks fall

LONDON: Global equities are expected to rise after Wednesday’s meeting of the US Federal Reserve, and several indicators based on market levels and positioning signal.

The stock markets have taken a beating as investors have increased bets that an era of ultra-low interest rates and huge pools of liquidity that increased risk assets is rapidly disappearing. The Fed is expected to signal later in the day that it will embark on a tightening of policy with rate hikes and balance sheet cuts.

Global stocks have lost 7 percent so far in 2022, with the Nasdaq Composite set for its worst start to the year since 1980, as high-flying technology stocks fall into disfavor.

But many reckon the markets may have found a temporary bottom.

Goldman Sachs told customers that the decline did not indicate a “danger zone” had been reached and that its risk indicator models suggest that markets are approaching levels considered good entry points for long-term investors.

Citibank also advised investors to consider buying into market declines. Based on a series of 18 measurements, it said the number of “red flags” in U.S. markets was far lower than before the 2008 crisis and the bursting of the dotcom bubble.

Below are some more indicators that signal conditions for a bounce:

1 / SOLD OUT TERRITORY

Chartists have been keeping an eye on the relative strength index (RSI) to measure oversold ratios for US indices after this month’s ructions. A level below 30 is traditionally seen as a sign that a sale has gone too far and points to a short-term rejection point.

All three major US benchmarks are trading below that level, and the Nasdaq 100 – which has lost $ 3 trillion in market value this year – fell to its all-time low since December 2018 of 25.4.

“The US markets now appear to be oversold. I sense a rally,” said a UK-based dealer.

Nasdaq 100 RSI https://fingfx.thomsonreuters.com/gfx/mkt/xmpjojgolvr/Nasdaqper cent20100per cent20RSI.PNG

2 / EXTREME BEARISHED

The latest sentiment survey from the American Association of Individual Investors (AAII) showed retail investors in an extremely bearish mood; considered a classic contrarian signal, the indicator hovers near the lowest for almost three years.

AAII https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnwrgapq/AAII.JPG

3 / TAKING PROFIT FROM SHORTS

Net short positioning across US benchmarks also points to a short-term bounce, potentially triggered by investors locking in profits from successful bearish bets.

While S&P has shifted from net long to net short, Nasdaq positioning remains net short and, according to Citi, the most “negatively expanded”.

Recent sales were more sentiment-driven than linked to new macro data, the bank said, adding that Nasdaq futures positioning was a “one-sided short with profit levels rising rapidly, which could lead to a short-term recovery.”

Overall, the picture of future currents involved “weak conviction,” they added.

(Reprinted with permission from Citi Research. Do not reproduce.)

Weekly Streams in the United States https://fingfx.thomsonreuters.com/gfx/mkt/akpezngzlvr/USper cent20futuresper cent20weeklyper cent20flows.PNG

4 / FRENZIGEDE PUTS

The insane rush for exits is also visible in the options markets. The CBOE put-to-call ratio has hit its peak since the start of the pandemic in early 2020, signaling that investors may become too pessimistic in the short term. Put options give the right to sell at a pre-agreed price, and calls allow holders to buy.

putcall https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwxmkdpo/putcall.JPG

(Reporting by Saikat Chatterjee in London and Danilo Masoni in Milan; Editing by John Stonestreet)

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