Stocks Soar to Break Seven Week Decline

Ed Mertiri |

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Has the market finally hit a bottom?

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Equities were remarkably higher last week. Both the S&P 500 and Nasdaq broke their seven-week streak of declines, while the Dow broke an eight-week streak. The S&P posted the biggest weekly gain since Nov-20 and Nasdaq since late March (and Nov-20 before that). All sectors rallied with the S&P 500 Growth (+7.3%) outpacing the S&P 500 Value (+5.9%). There were no pockets of outright weakness, though some of the relative laggards included medtech and biotech, pharma, food, media and entertainment.

There is a growing contradiction in stock market signals, cash inflows hit a 10-week high yet sentiment indicators keep declining. Bloomberg noted global equities attracted ~$20B in the week to 25-May, the third-straight week of inflows. In contrast, the latest AAII Sentiment Survey showed bulls decreasing to 19.8% from 26.0%, a 27th straight week below the 38.0% historical average. These types of signals are commonly referred to as contrarian buy signals. Mostly driven by very depressed sentiment and positioning indicators. A few large financial institutions, including Citigroup, noted that their models are signaling a bottom.

Some of the positive news that helped drive last week’s inflows included: early signs the inflation and the Federal Reserve might have hit their peaks, reopening in Shanghai, a much lower bar for retailers and declining Treasury yields. However, the contrarian buy signs are in very early stages and last week’s roar could turn into a short term bear market rally rather than a full capitulation.

Bond prices also improved last week, with yields mostly moving lower. The treasury curve steepened last week, with the two- year back below 2.5%, the 10% around 2.75%, and the 30 year bond below 3%.

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