Stocks: Oversold bounce likely to fade

Following Monday’s big drop when the Nasdaq closed at its lowest level since November 2020, US index futures rebounded sharply to start the day. But with the lack of any fundamental news, this looks like a short covering rebound from oversold levels. As such, I continue to expect further weakness is likely. If anything, there is a risk that fears over stagflation and tighter monetary conditions may intensify, especially if US inflation data on Wednesday reveals CPI did not ease to 8.1% as expected from 8.5% y/y in March.

In fact, judging by the ISM manufacturing and services PMI reports, prices paid continued to rise in April – although at a slower pace in the case of the manufacturing sector, but still near record highs. Also on the rise were supplier delivery times for manufacturing and services. On top of this, the University of Michigan’s consumer inflation expectations report revealed the 1-year outlook is at a 40-year high.

As such, it would be brave to talk about peak inflation just yet. Even if inflation peaks this month, it could go back down very slowly. In any case, as the Fed and other major central banks have started or about to start quantitative tightening, equity prices are likely to remain volatile for a long time. So, any short-term strength should be treated with extra care.

Indeed, it is worth pointing out that some of the bearish speculators who may have missed out on the big drop, may well step in now that we have seen a decent bounce. Meanwhile, trapped longs may use this as an opportunity to lighten up. This is because the S&P has been making lower lows and lower highs for much of this year inside a wide corridor:

Source: StoneX and TradingView.com

More recently, the periods when the market has been in a recovery mode have shrunk while sell-off phases have steepened. This is a reflection of investor pessimism growing, as highlighted for example by the Nasdaq wiping out its entire 2021 gains following Monday’s sell-off. The S&P 500 has – for now – remained more than 8% above its corresponding 2021 low as at Monday’s close. That’s not to say it won’t eventually get there, but clearly highlights the fact that techs have been underperforming. The key question going forward is whether other sectors of the equity markets may also be dragged lower.

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.