The S&P 500 pulled off its most dramatic intraday turnaround this year on Tuesday, extending the rebound from its worst day of 2019, but investors shouldn't be too optimistic about the comeback, Nomura warns.
The rebound, supported by dip buying and technical positioning by speculative traders, is bound to be a short-lived one as market sentiment continues to deteriorate, according to Nomura macro and quant strategist Masanari Takada. He garnered much attention this week for his call for a "Lehman-like" sell-off as soon as late August.
"We see the rebound in US stocks as a mere technical rally that looks like no more than a bump in the road on the way down," Takada said in a note Thursday. "We think the market is likely to resist further downside thanks to a combination of bargain hunting by fundamentals-oriented investors and contrarian buying by ultra-short-term traders through perhaps 15 August."
Hedge funds and other players are set to flee the market once when their algorithms are triggered, the strategist said, adding their major trigger line is at around 2,960 for the S&P 500. The index closed Wednesday at 2,883.98, erasing a loss of almost 2% to eke out a gain.
"We would expect trend-followers that are currently sitting on unrealized losses to start exiting their long positions in equities at a quickening pace," Takada said. "The present market rebound could well turn out to be a mere technical rally if CTAs treat it as an opportunity to sell."
Long/short hedge funds have already started turning bearish as they rotate from cyclicals to the defensive sector, the strategist noted.
Takada said in a note to clients Tuesday that the next sell-off could resemble a crisis-level plunge like the one that followed Lehman Brothers' collapse. The bold call turned heads on Wall Street as many see a market correction at most. The call is based on Nomura's proprietary sentiment data, which shows a "deterioration in supply demand for equities and a sharp downward break in fundamentals."
Markets were sent into turmoil last week when President Donald Trump abruptly ended the cease-fire in the trade war with China by planning additional tariffs. The sell-off deepened after China struck back by halting the purchase of U.S. farm goods and allowing its currency to fall to a key level unseen since 2008.
The plunge triggered a major flight-to-safety move, pushing the yield on 10-year Treasury note to a low of 1.595% on Wednesday, the lowest since autumn 2016. Meanwhile, gold surged to above $1,500, its highest level in more than six years.
— CNBC's Michael Bloom contributed to this report.