Is the January rally real or the last bear market trap?

So says Russ Mould, Chief Investment Officer of AJ Bell, in one of his latest market commentaries. He stresses that it’s important to remember that “mood follows price,” so investors “still have to coolly assess whether this really is the start of the next bull market or just another bull market trap.” bear market that is going to be a bear market”. will trap the unwary and inflict more pain on them.“.

The British firm’s strategist believes that it is “understandable” that some investors are “inclined to think that the happy days are here again”, especially after the complicated period of 2022 that we have just left, which has been bad for all assets. And all the more so if we consider the strong performance of, for example, the Bitcoinwhich is up 40% from its all-time low, despite the FTX scandal engulfing cryptocurrencies.

Or of You’re herewhich has recovered by a third and the noise of its electric cars is once again echoing in the stock market. But, says Mold, even “the strongest proponent of any of these assets or stocks will have to recognize that none of these gains outweigh the declines seen in 2022.”

Moreover, he says, “January’s gains do not necessarily break the depressing sequence of lower highs and lows on price charts that is so typical of an ongoing bear market,” so the maxim that should guide investors’ bets right now is as follows. Warning.

CAUTION FOR TWO REASONS

As this expert points out, “Caution may be necessary for two other reasons”.. First, because “it’s very unusual for previous bull market leaders to be market favorites for a second time (particularly because many people lose confidence in them because they’ve lost a lot of money). money with them).

Second, according to Mr. Mould, it is important to remember that these rallies “could simply be the last trap of the bear market, and. bear market traps hurt“.

He points out that after the bursting of the tech bubble of 1998-2000, there were “no less than nine major increases in the consumer price index.” Nasdaq“which brought” an average gain of 23% during the last great disgrace of technology stocks and which only exposed buyers to a new bear market, the Nasdaq having fallen 78% since its peak of 5,049 points in March 2000 to its lowest level of 1,114 points in October 2002”.

” Two reversals produced gains of over 40% and one of over 30%, but buyers were still dragged into their loss.The combination of lofty valuations, high expectations and earnings disappointments proved too much for share prices to handle,” insists Mould. And that is why he advises caution.

As he points out, only one of the aforementioned rallies reached the previous high, and each subsequent pullback “marked a new low, gradually negating any positive buyer sentiment.”

ALL EYES ON THE FED

” Right now, [BuyersarewaitingforhelpfromtheUSFederalReserve(Fed)[Lesacheteursattendentl’aidedelaRéservefédéraleaméricaine(Fed)“The widely held view is that a spike in inflation would allow the central bank to slow the pace of interest rate hikes, pause them and eventually pivot to rate cuts.

However, according to Mr. Mould, even if events unfold as the market predicts, investors “must remember that the Nasdaq bubble of 1998-2000 collapsed in 2000-2002, even as the Fed was reducing frantically interest rates from 6% to 1.25%”.

The AJ Bell strategist recalls that the American central bank raised its rates from 4.50% to 6.00% in 1999 and 2000 and that this had already contributed to “pulling the cover to itself and causing a revaluation of values of growth. Furthermore, the Fed changed course “only because the markets and the economy had cracked, but necessarily because it was still in control.”

” On this occasion, the bears have decided to “fight the Federal Reserve”.and they won, again, because the Nasdaq rally had left valuations so high, encouraged so many new companies to go public, and created such high expectations that ultimately stocks could not sustain their prices, new issues overwhelmed potential buyers and profits did not follow,” he concludes.