Aug 26, 2022
A Reason Why We Believe The Bear Market Rally Has Ended
Where Are Markets Headed?
The debate about whether the summer rally in stocks represents a new bull market or a bear market rally continues, though the building weight of evidence supports the bear market rally thesis.
Especially telling is the accompanying chart below, which illustrates that short sale capital flows have recently plummeted to levels only seen in recent years during the strong rally following the March 2020 market crash. It is a characteristic of bear market rallies that they should include a significant component of short covering, and that notion is certainly supported by this chart and others that we have posted.
The end of the stock buying impetus provided by short covering must be added to other factors, such as rapidly rising interest rates and geopolitical factors, in determining the nature of the recent stock market rally. That we have yet to see a market bottom accompanied by a peak in negative investor sentiment, or a substantive indication that interest rate increases will soon end, cause us to anticipate a retest of the previous low (at the least) in the coming months.
Though we believe that we remain in a bear market, we also look forward to the eventual appearance of the next bull market. The emergence of new leaders early in a bull market often represents the most attractive risk/reward opportunities. Navigating the risks between now and then will require the attention of investors to fundamental, technical, and geopolitical factors. The current investment environment is unusually macro-driven and challenging, which we believe will come to define the investment landscape of the 2020s.
Each month in the Global Investment Letter I update my investing activities, as well as comment on major global equity, fixed income, currency, and commodity markets.
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