Santoli: This latest reflex bounce for the market stokes hope, but preserves doubt for investors

Published Thu, Jan 20 202212:57 PM ESTUpdated Thu, Jan 20 20221:31 PM EST

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. The tape finally got stretched enough to allow for a decent snapback, which started right at the line that we and so many others have been watching. The S & P 500 Wednesday closed right at that old early-September peak. This was also near the 100-day average and slightly below the -6% pullback line, which was about the maximum decline seen last year on an intraday basis. The index was more oversold than at any time since last Sept. 30, when the late-summer setback was about to form a low. So far, so good, but this goes only so far. Reflex bounces like this after a few weeks of selling pressure always stoke hope while preserving doubt. A lasting recovery needs both hope and doubt, but they also tend to combine for switchbacks and head fakes. Options-expiration Friday has been cited as keeping a bit of a lid on the indexes, which could lift as expiration nears and clears, though the true seasonal tail winds don't start (on average) until near the end of January. On a short-term frame, the S & P is operating below Wednesday morning's high and is attempting to see if 4,600-ish area will be any kind of barrier. Tactical games are part of a longer fight to sort out how much assets need ultimately to reprice to reflect the interplay of high but hopefully topping inflation, a lot of Federal Reserve tightening already built into bond yields and high, if less universally stellar, corporate profitability. As is typical, the most harshly punished parts of the market (cloud software, small-cap growth, ARKK , recent IPOs, SPACs) are showing the greatest relief. That'd likely be the case whether this is a dead-cat bounce or a phoenix-like rejuvenation of the aggressive-growth cohort. That part of the market shoulders a high burden of proof, for sure. But there's also a long way up just to relieve deeply oversold readings. Modest backsliding of the value-growth relationship is underway more broadly. "Pure value" is lagging "pure growth" today by 0.7%, but so far this month pure value remains ahead by a gaping 14 percentage points. Most of what has been going on in recent weeks is the valuation premium in stocks driven by the crowding into dominant growth companies has been draining away. Software stocks have unwound all of last year's valuation surge versus the market, but it remains well above pre-Covid norms. Broad market is at less-demanding valuation levels, a good reminder that for long-term investors when share prices fall outside of a recession, risk comes down and forward returns should improve. The benchmarks aren't outright cheap but some air has leaked out, especially on an equal-weighted basis that reduces the mega-cap skew: Retail investor sentiment has taken a sharp negative turn, with American Association of Individual Investors ' bulls vs. bears pretty much at mid-2020 levels of anxiety. This isn't an instant infallible signal that the next big move is higher but it does have decent contrarian implications if the economy and markets are not in a stress spiral as in '07-'08. Prime-brokerage desks are also reporting that hedge fund exposures to tech and biotech have reached multiyear lows as well. It could surely be that this reflects a tidal shift in market leadership that will unfold over months or more, but at least the marquee stocks of the past few years are no longer as full of performance-chasing professional money. Treasury yields quiet, steady. Riskier corporate credit remains well supported, a positive input for equities all else equal. Market breadth is strong though not so powerfully so that it triggers any decisive calls about whether a durable low is in. NYSE up:down volume near 4:1. VIX easing back to 22. It will only drop so much when the index is moving 1%-plus, even when it's up that much. In general, the VIX set-up (including futures prices) are neutral more or less, not really over- or under-reacting to the recent moves.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, Nov. 8, 2021.

Michael Nagle | Bloomberg | Getty Images

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics.

The tape finally got stretched enough to allow for a decent snapback, which started right at the line that we and so many others have been watching.

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