The market may be “vulnerable” right now, but one strategist says there are three things that could signal a rebound.
This week has been a wild one for stocks following the end of the cease fire in the U.S.-China trade war this past weekend when President Trump announced a new round of tariffs on $300 billion worth of Chinese goods.
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That was followed up by China allowing its currency to slip below the psychological level of 7 to one U.S. dollar, and halting all purchases of U.S. agricultural products.
These events came on the heels of the Fed’s rate cut announcement late last week that sent shockwaves through the market as Chairman Jerome Powell said the quarter-point cut was merely a “mid-cycle adjustment” and hinted that no further easing was on the schedule for the time being – a blow to a market that expected this rate cut to be the beginning of a new monetary easing period.
With all of these events converging, fears have been rising and headlines have been fanning the flames. And there’s no doubt the market has been “vulnerable,” especially considering the sell-offs seen on Monday and again on Wednesday.
Stocks nearly erased the week’s losses on Thursday, but there were powerful voices warning investors not to be too optimistic about the rebound.
However, there’s one strategist who says there are three things that could send stocks rallying again.
Ed Clissold, Ned Davis Research’s chief U.S. strategist, believes that investor sentiment—especially any signs of pessimism—is the “number one thing you want to look for.”
“We’d like to see a little bit of a washout, and some of that just takes a little bit of time for people to digest information and to get a little more cautious,” Clissold said.
Clissold is also monitoring how oversold the market becomes.
While Monday’s sell-off saw the Dow drop more than 750 points, Clissold says even more extreme conditions could knock the market back on track, especially considering that stocks have looked overbought in the last few months.
Thus, stocks aren’t yet at that “washout level” Clissold is looking for. However, once the market does get to that oversold level, it could be a sign that a new rally is imminent.
Lastly, Clissold notes that earnings estimates for Q4 are still a little too high.
“We’d like to see those estimates get lower before we’d feel comfortable that there’s a little bit of a better fundamental underpinning to the market,” Clissold said.
So what should you do in the meantime? Clissold says investors should still “partially stay” in the market for now. The strategist believes there could be other rate cuts from the Fed, despite a non-recessionary environment, in reaction to the dimming global economic outlook and such cuts have historically pointed to more gains in the market.
Clissold projects the S&P 500 will be at 2,950 at the end of 2019, just twelve points higher than where it closed on Thursday.