No investor like stocks during times when the central bank tightens financial conditions. The Federal Reserve of the United States embarked on one of the steepest tightening cycles in its history to fight inflation.
Despite hiking aggressively, the Fed is probably not done with raising rates. This week, the St. Louis Federal Reserve Bank President James Bullard said that he favors more rate hikes and that a recession is unlikely.
As such, it makes sense to be bearish stocks. Yet, from a contrarian perspective, this might be a great time to do the opposite – to buy stocks. Here are four reasons to be bullish on the US stock market:
• Net short positions in the S&P 500 e-mini futures have reached the highest since 2011
• Investors’ allocation to equities relative to bonds has dropped the most since 2008
• 95% of investors expect stocks to be lower by year-end
• Price action favors more gains ahead
Net short positions in the S&P 500 e-mini futures have reached the highest since 2011
To start with, the short interest in the S&P 500 e-mini futures is the highest in more than one decade. The extreme over-the-top bearish sentiment favors a contrarian market move at these levels.
Investors’ allocation to equities relative to bonds has dropped the most since 2008
Investors run away from risky assets. According to the Bank of America Global Fund Manager Survey, investors allocate more funds to bonds than to stocks to extremes not seen since the Great Financial Crisis of 2008-2009.
95% of investors expect stocks to be lower by year-end
Another survey, this time from JP Morgan’s Strategic Research team, shows that no one is looking for a strong rest of the year for the US stock market. In fact, 95% of investors believe the opposite.
Also, the CNBC All-American Economic Survey has never shown such a gloomy picture of the US economy. Almost 70% of the people have a negative view of the economy.
Price action favors more gains ahead
Finally, price action favors more gains, as reflected by the S&P 500 index, which did not make a new 52-week low in the last six months following a bear market. Historically, this is a bullish development, with big chances for more gains ahead.
To sum up, while the sentiment is bearish, contrarians may find opportunities at the current market level. Of course, it depends a lot on how much of the Fed’s tightening is already priced in. Still, history favors more upside mainly because of the negative sentiment among population and investors.
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