Beware of the Gains in Stocks. It Looks Like a ‘Bear Market Rally.’

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Morgan Stanley expects more losses to follow the recent gain in the S&P 500.


The stock market has enjoyed a mini-rally in the past few days, but the latest gains look like an upsurge in the middle of a larger decline. 

The major indexes have shot higher since Thursday afternoon, when the

S&P 500

Nasdaq Composite
marked their lowest intraday levels of the year. Since then, the two indexes have risen 5.1% and 6.7%, respectively. Helping spur the gains was a comment from Federal Reserve Chairman Jerome Powell that implied the Fed won’t lift short-term interest rates as quickly as some fear in its battle against inflation. 

Mike Wilson, chief U.S. equity strategist at Morgan Stanley, doesn’t think the gains will last. “Stocks appear to have begun another material bear market rally,” he wrote. “After that, we remain confident that lower prices are still ahead.” 

Why shouldn’t people take the gain at face value? Well, it isn’t a surprise to see that stocks have gained ground. The market was so battered it seemed to be begging to be bought.

At its low point on Thursday, the S&P 500 was 12% below its 200-day moving average—a sign that stocks had been knocked far from their longer-term trend. The index was the farthest below its 200-day moving average it had been since the lows in March 2020, when the pandemic was setting in.

“It [the market] was oversold,” said John Kolovos, chief technical strategist at Macro Risk Advisors. 

Now, the market could get knocked right back down. Key to the case are valuations, which are still arguably too high.

The S&P 500 is trading at just over 17…


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