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Why one strategist calls this market rally 'socially acceptable volatility': Morning Brief

This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Thursday, July 21, 2022

Today's newsletter is by Jared Blikre, a reporter focused on the markets on Yahoo Finance. Follow him on Twitter @SPYJared.

The Nasdaq (^IXIC) notched its fifth gain in six days on Wednesday.

Over the last month, the S&P 500 and Nasdaq are both up better than 7.5%. And the small cap Russell 2000 has gained nearly 10% over that period.

On Tuesday, the tech index was up 3%. Meanwhile, 97% of S&P 500 (^GSPC) components closed green.

So while stocks are starting to put together a bit of a mid-summer move higher, just don't call it a bear market rally, says one Wall Street strategist. Because a bear market rally is just not a polite way to talk about this market.

A bear walks after Kurdish animal rights activists released it into the wild after rescuing bears from captivity in people homes, in Dohuk, Iraq February 11, 2021. REUTERS/Ari Jalal
Stock market bears have been on the run during the last few weeks of trading. REUTERS/Ari Jalal

Steve Sosnick, chief strategist at Interactive Brokers, joined Yahoo Finance Live Tuesday and offered up his typically colorful commentary on the language financial journalists and traders often use to describe current market conditions.

"Socially acceptable volatility" is what he and Options Solutions' Steve Sears have dubbed these flashy rallies. Rallies that, of course, tend to occur in bear markets.

Sosnick notes that big up days and big down days tend to cluster in these uncertain market regimes.

"Volatility works in both directions. It's a mathematical calculation," says Sosnick. "You go up [or] you go down by a certain percentage. But when we go up, psychologically it feels so much better."

But investors these days have only one question: Is this the bottom?

Sosnick doesn't think so, breaking down a familiar buzzword word that's been bandied about recently: capitulation.

Instead of framing capitulation in price action terms, Sosnick has one simple measure to identify these market clearing events — when people stop asking him about stocks.

"We haven't given up all hope," says Sosnick, noting that people are still asking him when's the best time to buy. "The real capitulation happens when people say, 'Oh God. I don't even — don't talk to me about this anymore,'" he says.

And we've now seen a few days in which some investors might have more positive things to say about the market.

On Wednesday, beaten down names like Peloton (PTON), Coinbase (COIN), and Dave (DAVE) among many others were among the market leaders. Dave and Peloton, however, are both down 90% from their all-time highs, and Coinbase is down 80%. Cold comfort for many of these companies' longer-term shareholders.

Meme stock heat map as seen on the YFi Interactive.
Meme stock heat map as seen on the YFi Interactive.

And this type of rally isn't exactly the most constructive setup.

The stocks with the worst technicals tend to have high short interest and often lead these so-called "junk-off-the-bottom" — or J.O.B. — rallies. Every new bull market starts off from bear market lows with something that looks like what we're seeing now. But in a durable rebound, we'd expect to see new, quality names emerge and take the reins.

Remember, in 2009 it was broken bank stocks like Citi (C) that led the charge higher. Thirteen years (and trillions in QE) later, Citi is still down an astounding 90% from its record highs.

A stock that is down 90% needs a 900% rally to break even. Many of this year's biggest losers will likely never even approach their 2021 records again.

But there are some quality names and sectors among this year's battered and bruised stocks that started showing signs of life a couple months ago — forming constructive bases as the majors hit new lows in June. Software stocks and some disruption names started picking up in May, and it appears Chinese stocks bottomed in March.

Mark Newton, CMT, managing director and head of technical strategy at Fundstrat, said that investors who are focusing on the Fed's next move instead of what's happening inside the market might also be missing the boat.

"Many investors continue to pay greater attention to the fears of recession and the FOMC’s plans to hike 75bps vs. 100bps, and largely are ignoring a very large rally happening in Technology along with the recent drop in inflation expectations, both of which seem important," Newton said in a note to clients.

Newton expects the S&P 500 to gain another 100 points through the end of this month. And in Newton's view, the widely-expected re-test of this year's 3,636 low on the S&P 500 may no longer be in play.

But skeptics still abound in markets, with Bank of America Global Research saying in a note on Wednesday that the "burden of proof is on the bulls to extend the summer rally."

Sosnick, for his part, isn't quite bearish in the short-term. Sentiment is poor, and positioning is low, opening up the possibility of a tactical long bet on stocks for many traders.

But, as always, caveat emptor — "Bear market rallies can be short," Sosnick said. "I call them short, sharp, and ferocious."

And, it seems, socially acceptable.

What to Watch Today

Economic calendar

  • 8:30 a.m. ET: Philadelphia Fed Business Outlook Index, July (-1.0 expected, -3.3 during prior month)

  • 8:30 a.m. ET: Initial jobless claims, week ended July 16 (240,000 expected, 244,000 during prior week)

  • 8:30 a.m. ET: Continuing claims, week ended July 9 (1.345 million expected, 1.331 during prior week)

  • 10:00 a.m. ET: Leading Index, June (-0.5% expected, -0.4% in during prior month)



  • AT&T (T), Travelers (TRV), D.R. Horton (DHI), Blackstone (BX), Union Pacific (UNP), American Airlines (AAL), Dow (DOW), Nokia (NOK), Danaher (DHR), Fifth Third Bancorp (FITB), Tractor Supply (TSCO), Marsh McLennan (MMC), Interpublic (IPG)


  • Snap (SNAP), Mattel (MAT), PPG Industries (PPG), Domino’s (DPZ), Tenet Healthcare (THC), Boston Beer (SAM)

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