These are the signs that the bear-market rally in stocks won’t last long, according to Citigroup

U.S. stocks have clawed back a significant proportion of their losses from the first half of the year, but the three major equity indexes tumbled this week under reviving fears about interest-rate increases by the Federal Reserve, and there are signs that the bulk of the bear-market rally is already behind us, said Citigroup’s analysts.

According to strategists at Citi Research, the current bear-market rally is almost in line with the length of an average bear-market bounce, and sentiment has already improved as much as it typically does during regular bear-market rallies, which would suggest a possible end to the rally relatively soon.

“Bear market rallies are often sentiment driven, as the market just becomes too bearish,” wrote Citi Research strategists led by Dirk Willer, the managing director and head of emerging market strategy, in a note on Thursday. “More fundamentally, many bear-market rallies are driven by hopes that the Fed comes to the rescue. The current one is no different, as the Fed pivot narrative has been an important catalyst.” 

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In particular, the chart below shows that the AAII bull-bear indicator, one of the closely watched investor sentiment surveys, is almost back to levels where bear-market rallies peak, with expectations that stock prices will rise over the next six months increasing 1.2 percentage points to 33.3% in the week of Aug. 15, while bearish sentiment increased 0.5 percentage point to 37.2%.


Meanwhile, the SKEW index for the S&P 500, which measures the difference between…


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