Bank of America says this is a 'bear market rally, not a real bull'

Published Mon, May 11 202010:56 AM EDT

(This story is for CNBC Pro subscribers only.) The market comeback is too narrow for this to be the start of a real bull market, according to Bank of America. The Wall Street firm said the current market rebound is a "bear market rally, not a real bull" until distressed equities rally alongside beloved stocks. "The mediocre performance of Low Price stocks, i.e. distressed equities from the bottom, suggests we may want to watch this factor for signs of confirmation that this is a real bull rather than a bear rally," Bank of America equity and quant strategist Savita Subramanian told clients. Back in February stocks experienced a dismal rout — the fastest bear market in history —as investors feared the economic fallout from the deadly coronavirus. However, in March, stocks started to rebound, on hopes reopenings of the economy and a Covid-19 treatment will create a path to recovery. The rally has left the Dow Jones Industrial Average and S & P 500 down only 14% and 9%, respectively, in 2020. Well off the lows of the year, Bank of America and other Wall Street firms have been skeptical about whether this rally is real. The five stocks that have carried the market over much of the last decade — Facebook, Apple, Microsoft, Amazon and Alphabet — are still the ones leading the rebound. Shares of Netflix are up 34% and Amazon is up 28% this year. The Nasdaq Composite became positive for the year last week, as technology darlings lead the market higher. At the same time, the S & P 500 small cap 600 index is down about 25% this year. Bank of America looked at past bull markets, like in March of 2009 when stocks emerged from the financial crisis, and bull market rallys like in December of 2008 — when stocks rallied but ultimately dropped again. "During the early stages of each of the prior real bull markets, our Low Price factor – read 'dollar stocks', or 'distressed equities' was the best performing factor, but did not lead in bear market rallies," said Subramanian. "In fact, prior bear market rallies saw mixed leadership." This rally appears to be narrow, leaving some of the smallest and most beaten down stocks behind. This could be evidence the pain is not over, the firm said. Stocks fell on Monday on fears certain cities are reopening the economy too soon. — with reporting from CNBC's Michael Bloom.

People with umbrellas pass by bull and bear outside Frankfurt's stock exchange during heavy rain in Frankfurt, Germany.

Kai Pfaffenbach | Reuters

(This story is for CNBC Pro subscribers only.)

The market comeback is too narrow for this to be the start of a real bull market, according to Bank of America.

The Wall Street firm said the current market rebound is a "bear market rally, not a real bull" until distressed equities rally alongside beloved stocks.