The Stock Market Bandwagon Is Filling Up Quickly

The U.S. stock market as measured by the MSCI USA Index just posted its best two-day performance since February, rising 1.58 percent Tuesday and 1.13 percent Wednesday. What’s notable is that the gains, in the wake of a nasty sell-off that left equities on the cusp of a correction, aren’t coming with the usual caution from prominent Wall Street strategists about “dead cat bounces.” Instead, they are expressing a remarkable sense of enthusiasm.

First, JPMorgan Chase & Co.’s all-world analyst Marko “Gandalf” Kolanovic issued a report Tuesday talking up the possibility that the October “rolling bear market” turns into a “rolling squeeze higher” into the end of the year. Then on Wednesday, Fundstrat Global Advisors’ Tom Lee — another analyst known for making exceptionally timely calls — went even further. He wrote in a research note that “the potential for a violent upside rally is substantial.” While a big part of Kolanovic’s thesis focused on fundamentals such as a likely surge in stock buybacks by companies, Lee honed in on the technicals. The percentage of stocks in the S&P 500 and Russell 2000 that are above their 50- and 200-day moving averages is “unusually low,” and that has often signaled a bottom when it has happened outside of a bear market but in a correction, reports Bloomberg News’s Kriti Gupta. As Lee points out, returns over the following three and six months — when the markets have become as “oversold” as they are now — have averaged 13 percent and 19 percent, with positive gains in eight of nine cases. Cynics might say that now would be the perfect time to sell given such unbridled optimism among strategists.