Not Everyone Is Sure the Stock Charts Are Sounding the All Clear

(Bloomberg) -- Enjoy the buoyant mood while it lasts, say a chorus of skeptics. It probably won’t be around for much longer.

They doubt the rebound in risk assets has much staying power, sensing hallmarks of an oversold bounce in Turnaround Tuesday. Stocks were battered so badly, so briskly Monday, that they were due for at least one session of recovery.

“If you like, you can cite President Trump’s optimism that a deal with China can get done as a ‘reason’ for the mood to improve, but I’m tempted to conclude that the real reason is -- it’s Tuesday!” writes Kit Juckes, global strategist at Societe Generale. “On which basis, I wouldn’t place too much faith that the current mood improvement is going to last all that long. Still, it can certainly last for a day or two.”

The Chinese yuan, which Juckes calls “the anchor of stability for all markets,” managed to snap its six-session losing streak -- the longest since August -- with a helping hand from the People’s Bank of China. That’s helped catalyze a world-wide risk rebound, helping rescue corners of the U.S. equity market in which selling had reached extreme levels.

The plunge in U.S. technology shares, which bore the brunt of the equity drawdown, constitutes the biggest loss of momentum in more than 28 years, by one measure. The 14-day relative strength index -- a gauge of the magnitude and persistence of price movements -- for the Nasdaq 100 posted its most negative 14-day swing since August 1990, bringing the tech-heavy index from technically overbought territory to the verge of oversold.

This phenomenon holds outside of tech, too. Bespoke Investment Group examined major U.S. equity index exchange-traded funds and found that most have made a “rapid” move toward the lower end of their trading ranges.

“Whereas last week the group was entirely overbought, they head into trading today at either oversold levels or neutral and on the cusp of oversold,’’ the analysts write.

John Kolovos, chief technical strategist at Macro Risk Advisors, highlights the scant share of S&P 500 members trading above their 10-day moving averages and limited volume to the upside over this span as characteristics of an oversold market. However, the “odds increased that more time and lower prices” are needed in light of the recent breach of the 50-day moving average for the benchmark gauge.

“Risk stabilized overnight, but hopes that trade talks improve in the near-term should prove fleeting especially as China’s stance has hardened,’’ writes TD Securities strategist Mazen Issa. “As a result, the equity market adjustment is probably not over.’’

Trump’s comments and micro-blog missives are an attempt to soothe markets, he concludes, but “the reality is that a ‘trade by tweet’ mentality is not a prudent long-term strategy.’’

On Monday, the S&P 500 plunged to its worst day in four months while the Nasdaq 100 fell more than it did even on Christmas Eve. Come Tuesday, the major benchmarks were all up more than 1% as of 1:05 p.m. in New York, as technology firms powered the gains. As headlines go, all it took were some conciliatory tweets and a softer tone to flip the sentiment switch.

For now, it seems the majority of investors have their hopes pinned on the idea that the U.S. and China will reach some form of agreement ahead of the G-20 meeting late next month, when President Trump and President Xi Jinping are expected to meet. But before that period, China is also set to raise tariffs on U.S. goods and the Trump administration has also readied a new list of products that could be subject to import tariffs.

Until then, large swings in equity markets either which way probably shouldn’t be trusted, according to Mark Hackett, chief of investment research at Nationwide Funds Group, which manages $60 billion. It’s likely too early to sound the all clear.

“I wouldn’t trust any of the trading activity that we’re seeing right now to make a definitive decision to buy or sell,” Hackett said in an interview at Bloomberg’s New York headquarters. “Yesterday felt a little bit capitulation based, today feels a little bit hope based, but in general, we don’t know. People are literally guessing at this point.”

To contact the reporters on this story: Luke Kawa in New York at lkawa@bloomberg.net;Sarah Ponczek in New York at sponczek2@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Chris Nagi

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