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“Trying to find a bottom is impossible,” says John Patrick Lee, a cryptocurrency analyst at VanEck, echoing views from a slew of market pundits struggling to decipher whether the latest market rally is a sign of capitulation or just a bear market bounce.
Wall Street capped a massive, two-day surge Tuesday in which the Dow Jones Industrial average soared 700 points and brought it, the S&P 500 and the Nasdaq above its 50-day moving average for the first time since April – a technical sign that could fuel further upside.
But Lee, like others wondering if the fresh gains are merely a dead-cat bounce, agrees skyrocketing inflation must show greater signs of ebbing before a more significant bounce can ensue.
While early second-quarter earnings from the likes of Netflix or Goldman Sachs showed some firms are navigating a 40-year high in prices better than anticipated, investors will remain eagle-eyed about fundamentals to ensure corporate America can survive an expected recession, analysts say.
Drawing a parallel between digital currencies and tech stocks, some of the better run small techs could rip harder than the bigger names just like altcoins such as Polygon or ENS have soared recently, eclipsing bitcoin and Ethereum, which have made fresh highs in recent days. Indeed, bitcoin’s wild surge to nearly $24,000 this week has hugely boosted miners such as Marathon Digital Assets (MARA) and Riot Blockchain (RIOT).
Bear market bounce?
Sam Stovall, head of research at CFRA, views the latest surge as a relief rally, mirroring views that investor capitulation has not yet emerged and that further equity losses are in the cards.
“Investors have been encouraged by Q2 EPS reports that have not been as dismal as initially predicted,” Stovall said in a client note Wednesday. “This led to a single-day rally in the S&P 500 of 2.76%. Questions swiftly emerged as to whether this was the start of a new bull market or just a bear market bounce. History says, but does not guarantee, that it is more likely a bear market bounce than the start of a new bull market.”
While the climb was “impressive,” it ranks #162 since 1945, Stovall added, noting that since WWII, every time the S&P 500 rose by 2.76% or more in a single day, 65% of those gains occurred during bear markets, with 71% happening before the market low was set.
Semiconductor plays
But Kim Forrest, Bokeh Capital Partners chief investment officer, begs to differ, noting that tech shares are firmly poised for near-term gains.
“I think the bottom is in,” she says. “Valuations have declined significantly as interest rates have gone up. That makes discounted cashflows more acceptable at lower earnings multiples,” such as those growth stocks carry, she points out.
Firms that help businesses boost productivity stand to gain sharply.
“Productive tech will snap back faster, such as customer relationship management (CRM) firms like Salesforce (CRM), which makes sales teams incredibly productive,” Forrest notes. “The Internet of Things (IOT) is also about to become a real thing as 5G gets rolled out in a meaningful way among all the telecoms.”
The investor also likes semiconductor plays set to benefit from lower component prices as China’s Covid lockdowns ease and demand from automobiles, consumer electronics and data servers remains firm.
In this space, Forrest likes beaten-down names such as Intel (INTC) and Micron Technology (MU). Software concerns that help businesses design chips are also in her buying list including Synopsis (SNPS). Enterprise data storage NetApp (NTAP) is also a favorite.
Forrest also believes inflation has peaked, despite the U.S.’s latest CPI surging to a higher-than-expected 9.2% in June. Beyond falling commodity prices (copper is down 30% since March) and easing supply chain bottlenecks, gasoline prices are also starting to fall, helping cut manufacturing costs.
Falling inflation
Ed Yardeni, head of Yardeni Research, agrees, noting that recent New York Fed surveys have pointed to falling price pressures that could mean July’s CPI (set to be released August 10) will show inflation is moderating.
But others insisted it’s too early to call a bottom. UBS analysts said tech valuations remain at 20% compared to 5% in the pre-pandemic era while Bernstein Research threw cold water at Bank of America’s survey Tuesday that investors have thrown the towel, heralding the end of the bear market.
“We have not yet seen capitulation in outflows from equity funds,” Bernstein strategists wrote. “In fact outflows, excluding Europe, have only just begun.”
BofA’s July global fund manager survey said full capitulation has been reached after equity allocations plunged to the lowest levels since October 2008. Meanwhile, exposure to risk assets dropped to levels unseen even during the global financial crisis.
Based on Wednesday’s market close, investors seem enamored with the idea of a tech bounce. The Nasdaq closed up 1.58%, largely outpacing the Dow and the S&P which saw milder gains. Some of the year’s biggest tech losers such as Netflix (NFLX), Etsy (ETSY), Alphabet (GOOGL) and Meta Platforms (META) rose sharply.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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