Market Fall leads to start of a Rally

Causes: Since the low in the middle of June, the S&P 500 is up nearly 18%. And it's down just over 10% since the high made on January 4.


Effects: Every time the market falls and unexpectedly starts to rally, people start talking about all the reasons the rally is hated. In other words, as the market goes down, people sell or go short, and they concoct a fully formed story in their head about how it deserves to go down more, and that the pain has really just begun. So bounces are painful on the PNL and psychologically difficult for people who have internalized the narrative shift.

This rally seems particularly hated and painful. For example, in the latest BofAML Fund Manager Survey, investor sentiment is characterized as "bearish, but no longer apocalyptically bearish." Managers are still holding cash levels well above their long-term average, implying conservative, under-exposed positioning.



What's in it for you: With this rally, we've seen a significant easing of financial conditions. Credit spreads have narrowed. Ceteris paribus, this easing should boost economic activity, and put further upward pressure on inflation, putting more onus on the Fed to tighten even faster. At least in theory the rally is sowing the seeds of its own demise, by pushing further into the future the date of any theoretical Fed pivot.

Support Links:

https://www.bloomberg.com/news/articles/2022-08-16/bofa-survey-shows-investors-no-longer-apocalyptically-bearish?cmpid=BBD081722_MKT&utm_medium=email&utm_source=newsletter&utm_term=220817&utm_campaign=markets#xj4y7vzkg

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