Investors have become so negative about the stock market that Wall Street is beginning to think a rally may be on the way.
Strategists at JPMorgan Chase & Co. led by Marko Kolanovic said this week that “investor sentiment is reaching extreme weakness,” meaning a rally could be on the cards. Meanwhile, a Societe Generale SA sentiment gauge recently fell to levels last seen during the peak of the Covid-19 Lockdowns in 2020.
“This is likely to culminate in a stock rally,” Societe Generale strategists Manish Kabra and Arthur Van Slooten wrote last week.
Other market technicals could also be pointing to a short-term rebound.
The absolute level of the US put-call ratio is near the highest since January after investors heaped hedges on the market’s decline amid recession fears and aggressive tightening. Barring another big hit, this should provide some support for stocks as investors start to undo those hedges after the Fed’s interest rate decision on Wednesday.
Additionally, the Cboe Volatility Index, also known as the VIX, has been at or above 30 for the past week; it touched a high of 32.82 on Tuesday. Traders often consider a reading of over 30 as a sign of significant fear in the market.
More importantly, the spread between the two-month and eight-month VIX futures contracts is trading near the highs seen earlier this year, showing deep uncertainty about the near term. This short-term stress indicator has historically been a turning point for risk assets, with volatility peaking in the days leading up to the previous three Fed meetings this year.
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