NEW YORK, Oct 19 (Reuters) – Some gauges of stock market health are showing the latest rally in U.S. equities could be the start of a sustained move higher, though many investors are hesitant to jump on board until there are signs of inflation. cooled.

Few can blame them for being skeptical. The current gain – which saw the S&P 500 bounce around 6.5% off last week’s fresh intraday low for 2022 – comes on the heels of several rebounds during the year that eventually crumbled. Meanwhile, the markets have been reeling from recent stomach-churning volatility that has wronged both bulls and bears.

If anything, the macroeconomic picture has only grown direr, as stronger-than-expected US inflation has increased expectations of Fed hawkishness and recession fears, adding to the reluctance on investors to participate in the recent rise.

Still, there are glimmers of hope. Some gauges that have prompted warnings over the year ahead are more positive, echoing a pattern of recent big upside moves in the S&P 500 that have been seen in previous market lows. The rally is also underpinned by some flat earnings reports in the United States and concerns about systemic risk around Britain’s budget woes.

“There are some signs that there are bottoms,” said Ed Clissold, chief US strategist at Ned Davis Research.

The S&P 500 has bounced several times this year only to hit new lows

Improving market breadth, which shows whether a significant amount of stocks are moving together, is one sign that has put investors at heart.

Only 34% of stocks hit new 52-week lows last week along with the S&P 500’s low, according to Todd Sohn, technical strategist at Strategas, compared with 43% when the index hit a 16-week low. June.

At the same time, measures of investor sentiment – including a monthly fund manager survey by Bank of America Global Research – show the highest pessimism in years, a contrarian indicator that has historically been a bullish sign for stocks.

The public sentiment poll compiled by Ned Davis Research, a composite indicator that includes investor surveys, options data and asset analysis, recently fell to a level that coincided with stock reversals in March 2020 and 2011.

“If we can get better economic/inflation/nutrition news it could be a pretty powerful rally,” Clissold said.

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Mark Hackett, head of investment research at Nationwide, points to the S&P 500 posting five days of gains of around 2% or more in the past month through Monday, noting that a similar pattern has occurred ahead of bottoms in 2020 and 2009.

Widespread investor pessimism, improved valuations and a strong seasonal period for stocks are among the factors that lead Hackett to conclude that “we’re close to bottoming out assuming we don’t have a huge decline from here.”

Morgan Stanley strategist Michael Wilson, who has been bullish on stocks this year, said this week that a “tradable tactical rally is likely”, with the S&P 500 rising as high as 4,000 “as well as a beat down opinion.” The index closed at 3,719.98 on Tuesday.

Not all indicators are telling a bullish story, including the Cboe Volatility Index (.VIX), known as Wall Street’s measure of fear. Reversals in stocks since 1990 have occurred after the index averaged 37, indicating a bout of fearful selling that gives way to bullish investors to take the market higher.

However, the index has not been above that level since March even as the S&P 500 continues to make new lows. It was about 30 last time.

“What’s happening is that the VIX is in this high range but it’s not too high and you don’t get that total ‘pukage’ in the markets,” said Michael Purves, chief executive of Tallbacken Capital.

VIX is above long-term median but below levels reached in other bear markets

Sohn, of Strategas, is also looking at the balance between puts, which are usually bought for downside protection, and calls. The call/put ratio has yet to approach a 10-day average of at least 1.2 which has historically indicated “that you are more in a panic and fear zone and close to a market low,” he said.

The current bear market was not as severe as previous downturns. The S&P 500 has slipped as much as 25.4% this year, and bear markets have declined an average of 35% since 1929, according to BofA.

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Markets have declined when “investors have begun to consider materially looser monetary policy over the next six to 12 months, when a trough for economic activity appears, or when valuations fully reflect a case already credible ‘bearing case’,” analyzed by UBS. Global Wealth Management wrote on Monday.

“Today, we do not believe that these conditions have been met.”

Reporting by Lewis Krauskopf; Additional reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Josie Kao

Our Standards: The Thomson Reuters Trust Principles.

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