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Bear market drivers ‘are starting to recede,’ analyst says

Evercore ISI's Rich Ross joins Yahoo Finance Live to discuss the drivers of the bear market and where stocks go from here.

Video transcript

JULIE HYMAN: All right, let's get a technical view of the market now. We bring in Rich Ross, Evercore ISI Senior Managing Director. He says he's once again buying dips and not selling rips. Rich, thank you so much for being here. Appreciate it.

And I know that you have been looking at some charts here, sort of bigger picture, that tell us where the market is going. Where do you want to start today in terms of what you're most focused on?

RICH ROSS: Well, you know what? Why don't we take it from the top here? Here at Evercore ISI, what we do the best is connecting the top-down macro with the bottom-up micro for our investors in order to generate alpha on a stock and sector basis.

So when I think about the top-down, what drove the bear market? It was the surge in yields, the surge in crude oil, the surge in inflation, and all the accouterments of inflation. And as we clearly see in the technicals, those are easing.

You've got a triple top and 10-year yields here in the US at 3%. And you continue to leak lower. We heard from Ines earlier about crude oil breaking below that $90 level, taking out the 200-day moving average along with gasoline. And just as we come on the air here, you see mortgage rates dip back below 5% for the first time in quite some time.

So those key top-down forces which have been the drivers, the headwinds, if you will, for equities, the driver of the bear market are starting to recede. And clearly, stocks are feeding off of that coming off of a powerful July.

BRIAN SOZZI: Hey, Rich, it's been a while. Good to see you. Thanks for hopping on here this morning. So is this correlation still in place, lower oil prices, stock market goes up?

RICH ROSS: Yeah, I think that's it. Look, there might be a point in the future where you get some diminishing marginal returns from weakness in crude. Look, when you think back to crises past, if the economy were to collapse-- and let's be clear, that's not the call here at this firm or on this segment. But if it were and you saw a precipitous drop in crude oil prices that was consistent with a precipitous drop in the economy-- again, not our call-- then it would be a negative.

But in the current context, Brian, lower crude, lower yields are good for the consumer. And they're good for the stock market, which is largely driven by tech growth and consumer stocks on an index level.

JULIE HYMAN: And I know you've been looking at the XLI too, which is the consumer discretionary ETF. What are you seeing from that chart that tells you about where it's going to go?

RICH ROSS: Yeah, interesting. Obviously, the consumer discretionary right at the eye of this macro maelstrom as it pertains to inflation, rates, gas, crude, et cetera. And what we've seen is a pullback to support which has helped for years. You're really going back to the financial crisis low back in 2009.

And we see that not just within the consumer stocks but across sectors, whether it's semiconductors, software, the S&P, and NDX themselves. So many bear market pullbacks have come to die, for lack of a better term, at this long-term support.

And again, kind of bringing you back to where we started, when you talk about consumer discretionary, there's no sector that's perhaps better positioned to benefit from some of the weakness that we see from that top-down macro across crude inflation and interest rates.

BRIAN SOZZI: There's been a lot of dumpster fires in all things tech. Now, Coinbase is getting a reprieve today because of that BlackRock news. I get it. But where are you seeing potential opportunities and some good chart formations in big cap tech?

RICH ROSS: Yeah, you know what? So we'll start big, and then we can work our way back around to some of the smaller, more longer-duration speculative plays that you alluded to in terms of Coinbase. So in terms of those big cap stocks, look at Amazon. We just talked about consumer discretionary. So Amazon was a stock that sort of led us lower. It was the first time that it broke below long-term support. That's the 200-week moving average. That's not an easy level to break below.

We hadn't done it since 2008, just to tell you how bad it had been. So you look at a chart like this and you say, Amazon is doing something technically it hasn't done since the depths of the financial crisis in '08. But this isn't the depths of the financial crisis. So somebody has this wrong here.

The stock did yeoman's work, whatever that is, building a base below that critical area of support. And now we've surged back above it. You're back in the good graces of the technicians. And Amazon is a stock that needs to be back on the buy list, even though I'm sure you look at your screen and you'll say, well, where was this guy last month? The stock's up 28% over the last 30 days.

I get it. It's not the earliest call, but it's the right call. Technical analysis is not just about picking tops and bottoms, although we wish it were. We're trying to get the fat pitches, the big part of the move in the middle. So if you lose the 10 at the bottom and the 10 at the top but you capture the 80% of that move in the middle, you'll take that every day, Brian.

JULIE HYMAN: So how much more is it going to go up, I guess, is the question then?

RICH ROSS: Yeah. Yeah, look, I think that's the question for everybody, not just on an Amazon stock-specific level but really on a market level. So when you think about some of the bear markets, let's compare and contrast to the '70s, kind of a decade in which many people have compared this to, just by virtue of the inflation, what we've seen with crude oil, et cetera, geopolitics, sort of civil unrest, as it were.

In the '70s, that first bear market brought you down about 30%. And within a year, you had recouped 90% of those losses. So when you think about an S&P that peaked around 4,800, I think 4,600 is a realistic upside target. I think 15 and change on the NDX is a realistic upside target. Those are levels that are worth playing for.

Look, I'm not saying today is day one of the next great secular bull market. But I'm telling you that we are probably in a cyclical bull market now, that the bear market that commenced back in January, February on an index level is over. The lows are in. And we should now be buying dips rather than selling rips, as has been the case for the last six months.

BRIAN SOZZI: Are there any sectors, Rich, that are starting to break down, sectors that did well last month but perhaps are starting to look a little toppy here in the short term?

RICH ROSS: Yeah, I think, look, it's a great question. And I'm going to go after energy here. I mean, when you think about the weakness that you've seen in crude oil, the weakness that you've seen in-- well, maybe the economy. I don't think it's too much of a stretch. We've had the definition, a technical recession, if you will It's sort of like transitory inflation, putting the qualifier on there.

But the economy is slowing, as it is wont to do. That's what you do when you hike interest rates. It's when you have inflation at a 40-year high. You tighten policy. The economy slows. And if the economy is slowing, I think energy coming off of a historic move back up into those highs, whether it's on an XLE level or even the underlying commodity itself, that's a group that I would want to be underweight relatively and perhaps short absolutely for those that have the fortitude.

BRIAN SOZZI: All right, well, thanks for bringing the heat as always for us. Rich Ross, Senior Managing Director and technical analyst at Evercore ISI. Always good to see you. We'll talk to you soon.

RICH ROSS: Thank you for having me.