Indices try to bounce after a tough week

Ahead of a long weekend, indices are off the lows of the week, but a sense of nervousness persists.

Source: Bloomberg

After the most volatile week in months, what happens now? Will we see further downside or, after a decent tussle between buyers and sellers, will the march higher for US indices resume?

Of course, it is impossible to know what comes next. After a small bounce on Thursday, markets struggled, but moving into Friday the buyers seem to be making a tentative appearance.

We use the usual tools to see what might happen next. In breadth terms, the vast majority of stocks in the major indices are below their 20-day moving averages. In addition, the put-call ratio has hit its highest level since the beginning of May.

Both these readings signal widespread bearishness, and while they could become ‘more’ bearish, the risk-reward from here for all major indices is skewed to the upside in the longer term.

It is always possible to go lower from here, and after such a sell-off the dust will take a while to settle. But as we discuss in this piece, the overall backdrop remains supportive of equities, particularly in the US.

This is not to say all markets will soar to new highs for the year, or new all-time highs. European and Asian markets have been losing ground steadily for months, and after a rebound they may begin to falter. The rule is ‘buy the strongest, sell the weakest’, and it still applies here.

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