The very bearish Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets says after heavy losses stocks could be set for gains over the coming days.
But investors would be wise to sell into these rallies, as technical indicators are still pointing to a bearish environment, Gijsels said.
“It looks like an oversold rally," he said. "However, it may be a rally that has some legs. Currently we see some very strong, often intraday, market volatility. This typically happens before market turns in all time frames."
"So, I would not be too surprised if this rally continues for a while," he said. "It could be hours, days and possibly even weeks."
But that doesn't mean the dark clouds have shifted.
“The market environment remains very difficult," Gijsels said. "In the second half the US and world economy will slow which will make it more difficult for companies to show strong earnings. On top of this the 'easy' cost cuts have already been made and gradually the comparison base will become more challenging."
Medicine Will Hurt
Gijsels said he medicine needed to wean Europe off its debt addiction is necessary, but says it will also add to the impending slowdown.
“Over the last week a lot of governments announced spending cuts and new taxes," he said. "This is part of the necessary healing process. But it will take time, be very hard and will not help consumer spending and corporate profitability either."
The charts also look very bearish to Gijsels, who said he is worried the "death cross" is about to be hit.
“The technical damage that has been done to the charts is quite formidable," he said. "A lot of indices have turned the corner and are trading below their 200-day moving average. In many case we are not too far from a death cross," a bearish sign where a 50-day moving average drops below the 200-day moving average.
Get out of Long Positions
Gijsels suggested selling into any rally as the volatility continues.
“This type of rally is a good moment to rethink and lighten up long positions," he said. "In most cases markets do not move in straight lines and there are second and even third and fourth chances for those willing to listen to what the market is saying."
In a bear market we sometimes get the strongest rallies like we saw after the EU/IMF/ECB bailout, he said, but added that the problem is that these rallies are very difficult to trade or predict.
“Remember that it is quite dangerous to try and play these rallies to the upside against the overall trend," he said. "In a down-market the surprises are also skewed to the downside."
Good Companies Will Survive
Investors should stay defensive and focus on quality stocks from defensive sectors.
“When a group of people travels through the desert it is not the fastest, smartest or most beautiful that survives," he said. "It is the one with the largest amount of water. In the world we live in it is the one with the best liquidity and solvability ratios. We look for companies with strong balance sheets and a strong brand."
The good will survive and benefit from the problems of the weak, he argued
“This is the opposite of what we saw since the rally from the March 2009 lows," he said. "There was a dash for trash. The lowest-quality companies made the biggest gains, this trend is over."