Ned Davis Research says the global bull market 'remains intact' despite sell-off

Published Fri, Jan 28 202212:08 PM ESTUpdated Fri, Jan 28 202212:38 PM EST

January's washout in stocks isn't the start of a new bear market but rather just a painful move out of crowded positions, according to Ned Davis Research. With stocks tumbling to start 2022, investors are nervous that things could get worse, particularly as the Federal Reserve tightens interest rates and corporate profits have come under scrutiny. But strategists at the firm say that the tripwires they have indicating a true bear market is on its way are still some distance away from being warning signs. "Oversold with pessimism extreme, the major equity benchmarks have been testing Monday's intraday lows this week, apparently building a base to be followed by renewed rallying. The global bull market uptrend remains intact," NDR chief global investment strategist Tim Hayes wrote in a report Thursday. Friday's market action featured more turbulence, with major averages turning higher around midday after a steep sell-off earlier. Hayes stressed that investors should look at the sectors where the most aggressive selling is happening. "The January market decline is thus better described as a stiff rotational correction than the start of a new bear market," he said. "In bailing out of technology, investors have sold the sector that's been the most overvalued and most prone to underperform when bond yields are rising." Indeed, the Nasdaq 100 , where most of the market's biggest tech names are listed, was off about 12% for the year to date around midday Friday. That's far worse than the S & P 500's 8% drop and the Dow's roughly 5% decline. Measured from the all-time high, the tech gauge was off more than 15%, putting it firmly into correction territory but not yet the 20% that would denote a bear market. With tech carrying such a big weighting in broad indexes, the outlook for investors has dimmed. NDR's sentiment index has hit its lowest point since April 2020. "And that makes it likely that the bad news has been priced in and that a bottoming process is under way," Hayes wrote. "The indicator mix is currently more consistent with the end of a correction than the onset of a new bear." Still, markets are fearing that a nearly 40-year high in inflation readings will push the Fed to tighten more quickly than expected. While markets already are pricing in five 25-basis-point rate hikes this year, Bank of America said it is actually looking for seven increases and the start of the Fed's bond portfolio runoff to happen as soon as May. Hayes said rates are worth watching and "could lead to warnings" along with indicators regarding valuation, global bond yields and the rate curve in the U.S. While he noted that previous high levels of optimism, weak market breadth and a low CBOE Volatility Index measure had raised flags late in 2021, "none of the other indicators" that NDR watches "are close to following suit."

Traders on the floor of the NYSE, Jan. 27, 2022.

Source: NYSE

January's washout in stocks isn't the start of a new bear market but rather just a painful move out of crowded positions, according to Ned Davis Research.

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