Analysis: Buy the rebound? Investors look at valuations, technical levels to decide

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A trader looks at his chart as he works on the floor of the New York Stock Exchange on July 8, 2014. REUTERS / Brendan McDermid / file Photo

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NEW YORK, Jan 12 (Reuters) – As equities attempt to recover from a brutal sell-off, investors are looking at a number of parameters to decide whether to buy the rally or prepare for further falls.

The Nasdaq Composite Index (.IXIC) closed up 1.4% on Tuesday, a day after falling more than 10% from its record close on November 19 during intraday trading before rising at the end of the session. to know more

Benchmark 10-year US Treasury yields rose 20 basis points this month in anticipation of a more aggressive Federal Reserve and are near their highest level since January 2020. Growth and technology stocks can be particularly sensitive to longer yields. high as they threaten to erode the value of future cash flows.

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“We are entering a period where you will see truly dramatic changes in leadership and volatility” in the equity market as the Fed prepares to hike rates, said Liz Ann Sonders, Charles Schwab’s chief investment strategist.

A look at historical valuations shows that there may be further drawbacks for technology and growth stocks.

The price-to-earnings multiple of growing companies is 15 points higher than that of so-called value stocks, compared to a long-term average of six points, wrote Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, in a recent report.

The Russell 1000 Growth Index (.RLG) has fallen 3.8% year to date, while the Russell 100 Value (.RLV), which tracks the shares of banks, energy companies and other relatively cheap and economically sensitive stocks, has risen 1.4%.

UBS expects the broad market to rise, with a year-end price target of 5100 on the S&P 500, about 8.2% higher than the close on Tuesday.

However, “investors will need to be agile in 2022 and be aware of any excessive exposure they may have to rising stocks,” wrote Marcelli.

Others are less bullish. Analysts at BofA Global Research said the nearly 2% decline the S&P 500 (.SPX) recorded in the first five trading days of January bodes badly for its performance for the rest of the year.

The S&P 500 closes the year up nearly 75% of the time, offering an average return of around 11% when the first five trading sessions of the year are up.

When the first five sessions are down, the year is only up 52% ​​of the time, with an average return of 1.77%, analysts at BoFA’a said in a report. The S&P 500 – in which tech-focused stocks carry a heavy weight – has risen nearly 27% in 2021 and is down 1.1% so far this year.

Cantor Fitzgerald analysts, meanwhile, warned that “a significant sell-off is coming,” in the face of a more aggressive Fed calling for a 10% or more pullback by the end of February.

Alarming signs include a sharp rise in global bond yields that have tarnished the attractiveness of equities and an 80% increase in margin debt among individual investors over the past two years, they said in a recent statement.

“Equity exposure is at an all-time high, which means that a stock withdrawal will outstrip to the downside,” wrote Eric Johnston, the company’s head of equity derivatives and cross-activities.

Bespoke Investment Group analysts are looking at the technical levels. They noted that the exchange traded fund QQQ (QQQ.O), which tracks the Nasdaq 100, closed Friday in “extreme oversold” territory, a sign that the index could hit a near-term low. Since 1999, the Nasdaq 100 has gained 4.9% in the six months following an “extreme oversold” reading, according to Bespoke.

Jim Paulsen, chief investment officer of Leuthold Group, believes strong earnings expected in the next two quarters are likely to make any market sale short-lived.

“If a correction is occurring now or later this year, it will likely be satisfied with solid business fundamentals,” he said.

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Reporting by David Randall; Additional reporting by Ira Iosebashvili; Editing by Ira Iosebashvili and Lisa Shumaker

Our Standards: Thomson Reuters Trust Principles.

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