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Market signals scream buy after world stocks tumble

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·3-min read
Passersby wearing protective face masks walk past a stock quotation board, amid the coronavirus disease (COVID-19) pandemic, in Tokyo
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By Saikat Chatterjee and Danilo Masoni

LONDON (Reuters) - Global equities are due a rebound after Wednesday's meeting of the U.S. Federal Reserve, several indicators based on market levels and positioning are signalling.

Share markets have taken a beating as investors have ramped up bets that an era of ultra-low interest rates and vast pools of liquidity that boosted risk assets is fading quickly. The Fed is expected to signal later in the day that it will embark on policy tightening with rate hikes and balance sheet cutbacks.

Global stocks have lost 7% so far in 2022, with the Nasdaq Composite set for its worst start to the year since 1980 as high-flying technology shares fall out of favour.

But many reckon markets may have found a temporary bottom.

Goldman Sachs told clients the falls did not indicate a "danger zone" had been reached and that its risk indicator models suggest markets are nearing levels that are considered good entry points for longer-term investors.

Citibank too advised investors to consider buying into market dips. Based on a series of 18 metrics it said the number of "red flags" on U.S. markets was far lower than before the 2008 crisis and the bursting of the dotcom bubble.

Below are some more indicators signalling conditions for a bounce:

1/OVERSOLD TERRITORY

Chartists have been watching the relative strength index (RSI) to gauge oversold conditions for U.S. indices after this month's ructions. A level below 30 is traditionally seen as indicating a selloff has gone too far and pointing to a short-term bounce.

All three major U.S. benchmarks are trading below that level, and the Nasdaq 100 - which has shed $3 trillion in market value this year - fell all the way to the lowest since December 2018 at 25.4.

"U.S. markets are now looking oversold. I sense a rally," one UK-based trader said.

Nasdaq 100 RSI https://fingfx.thomsonreuters.com/gfx/mkt/xmpjojgolvr/Nasdaq%20100%20RSI.PNG

2/EXTREME BEARISHNESS

The latest sentiment survey by American Association of Individual Investors (AAII) showed retail investors in an extremely bearish mood; considered a classic contrarian signal, the indicator is hovering near its lowest in almost three years.

AAII https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnwrgapq/AAII.JPG

3/TAKING PROFITS FROM SHORTS

Net short positioning across U.S. benchmarks also points to a near-term bounce, potentially triggered by investors locking in profits from successful bearish bets.

While the S&P has switched from net long to net short, Nasdaq positioning remains net short and according to Citi, the most "negatively extended".

Recent selling was more sentiment-driven than linked to new macro data, the bank said, adding that Nasdaq futures positioning was a "one-sided short with profit levels rapidly rising which could lead to a short-term rebound."

Overall, the futures flows picture implied "weak conviction," they added.

(Reprinted with permission of Citi Research. Not to be reproduced.)

US weekly flows https://fingfx.thomsonreuters.com/gfx/mkt/akpezngzlvr/US%20futures%20weekly%20flows.PNG

4/FRENZIED PUTS

The frenzied rush for the exits is also visible in the options markets. The CBOE put-to-call ratio has hit its highest since the start of the pandemic in early 2020, signalling investors may be getting too pessimistic in the short term. Put options confer the right to sell at a pre-agreed price and calls allow holders to buy.

putcall https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwxmkdpo/putcall.JPG

(Reporting by Saikat Chatterjee in London and Danilo Masoni in Milan; Editing by John Stonestreet)

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