Bernstein's Top Indicator Triggers a Buy Signal, Suggests Short-term Tactical Bounce

September 29, 2022 6:43 AM EDT
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Composite Sentiment Indicator (CSI), Bernstein’s contrarian indicator, has dropped to levels that indicate a short-term tactical bounce is possible.

The indicator sits at -1.23 with levels at -1 or below indicating excessively bearish sentiment. Vice versa, readings at or above +1 indicate excessively bullish sentiment.

“Over the past 22 years buy signals have been followed by positive 4 week forward global equity market returns over 70% of the time. We consider this signal as a potential short term tactical buying opportunity but remain cautious on equities over a medium term horizon,” Bernstein strategists Mark Diver and Sarah McCarthy wrote in a client note.

Strategists reiterate that CSI dropping below -1 doesn’t indicate the 2022 bear market is over. Instead, this extremely negative reading suggests that “investor sentiment has now reached such negative levels that in the short term (i.e. over the next 4 weeks) the probability of global equities making positive returns is greater than generating negative returns at this juncture.”

“Over the last 85 years, major market drawdowns have had 3 intermittent bear market rallies on average. There have been two bear market rallies since the start of the year, so another bear market rally is very possible,” strategists added in a note.

Along these lines, Bernstein remains cautious over the medium term on equities amid red-hot inflation and aggressive central bank tightening.

“We need to see capitulation in terms of both earnings forecasts and flows before becoming more positive on a market recovery beyond a very tactical horizon,” strategists concluded.

By Senad Karaahmetovic

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