The market’s summer rally has relieved this year’s most painful trades

The market’s recent rally has granted a much-needed reprieve to this year’s hardest-hit stocks, stoking optimism among bulls that the worst is over.

“From our perch on the market radar screen, we’d think a glance at recent sector performance at least shows where the market wants to go whenever it breaks free from the bear grip that took it hostage for most of the first half of this year ,” Oppenheimer Asset Management Chief Investment Strategist John Stoltzfus said in a note out Monday.

Beaten-down technology names have lifted the Nasdaq nearly 10% since last since mid-June after the index logged its worst first half of the year on record.

Former high-flyers like Coinbase (COIN) and Peloton (PTON) each rose over 25% during a five-day period ended last Thursday.

And at the sector level, we’ve seen leadership from Consumer Discretionary (XLY) and Technology (XLK), two of the three worst-performing sectors this year along with Communication Services (XLC).

Meanwhile, Energy (XLE) has been the only loser during this recent rally, though this sector is the only among the 11 sectors in the S&P 500 sitting ten year-to-date gains.

Source: Oppenheimer Asset Management

This reversal should not be a complete surprise to investors steeped in market history, as the sectors first to fall in bear markets are often at the front of line on the way up. For example, tech led gains for two years after the dot-com crash saw the Nasdaq lose 80% from peak to trough.

Some strategists, however, are doubtful recent gains can be sustained.

“Investors still have a love affair with growth stocks, particularly tech given their outstanding performance over the past decade,” Morgan Stanley Chief Investment Officer Mike Wilson wrote in a note out earlier this week. “However, many of these stocks are more economically sensitive than many still appreciate and if recession is coming, these stocks will not do well.”

Investors cheered on last Tuesday’s rally, which marked the best day for positive breadth rising — or the number of stocks versus the number declining — on the New York Stock Exchange since January 4, 2019, according to data from LPL Financial.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, US, July 19, 2022. REUTERS/Brendan McDermid

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, US, July 19, 2022. REUTERS/Brendan McDermid

Analysts at Bank of America pointed out that 93% of NYSE stocks advanced on 94% of volume — positive breadth seen only 79 times before.

However, as of the same day, 25% of stocks in the S&P 500 were lower than they were a month ago, and the percent of stocks above their respective 200-day moving average ticked up only marginally, from 13% to 18%.

“For the most part over the past month, the data there has been lackluster,” LPL strategist Scott Brown said in a note. “The best performing areas of the market have been oversold growth sectors, such as discretionary and technology, but defensives are close behind and cyclical value has been flat to lower over the time.”

And as Brown said elsewhere: “The S&P 500 is not out of the woods yet.”

The week ahead will be a pivotal test of investor confidence and provide some clarity about whether a recession is underway.

On Thursday, investors will get a preliminary estimate of second-quarter gross domestic product (GDP) – the broadest measure of economic activity. If the figure shows the economy contracted last month, it would mark the second consecutive quarter of negative economic growth, affirming to some investors the economy has entered recession.

Economists surveyed by Bloomberg expect GDP rose 0.5% last quarter.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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