News

(Bloomberg) — The steep recovery in equity markets over the past two weeks is typical of bear market rallies, and the erratic swings mean almost every investor will experience pain whichever direction the market suddenly moves.

Goldman Sachs Group Inc. ( GS ) strategist Peter Oppenheimer said “the asymmetry for equity investing is poor. Sharp rallies within bear markets are the norm, not the exception.”

The biggest market driver is still uncertainty, with no real long-term bullish or bearish conviction seen from investors. Price action is mainly fueled by short-term headlines and guesswork on how the quickly evolving US tariffs story will be told through corporate earnings and resetting valuations.

“If the tariff announcements are reversed quickly with little lasting economic damage, this does suggest that the downside risks are limited. Nonetheless, at current valuations, we also think the upside is limited,” Oppenheimer wrote in a note.

Investing becomes far more difficult in such a regime, when both upside and downside are seen as limited and decision making is caught in foggy headline risk. Market participants have to choose between chasing a fading rally then risk exiting too late, or missing out entirely on another squeeze higher. They want to avoid trap doors in a tricky macroeconomic environment while still being able to capture opportunities.

“This equities trade is nasty, and the one scenario that nobody wanted,” Nomura Securities cross-asset strategist Charlie McElligott said. Many investors were forced to de-risk when there was zero visibility on tariffs in early April, but are now being forced to buy into a rally very few had enough exposure to fully benefit from its performance.

There is confirmation of “holding your nose and forced to buy-back exposure” playing out in stock-index options, “despite most investors hating the eventual macro growth outlook ahead,” McElligott wrote in a note.

If history is any guide, one of the sharpest intra-month rebounds in stock market history in April may have exhausted gains. Since 1980, the global stock market underwent several bear market rallies, which on average lasted for 44 days and saw gains of 14%. And while this year’s global stocks decline isn’t officially a bear market, prices are up 18% from an intraday low hit on April 7.

“Rates and risk assets will continue to be headline driven,” said Academy Securities macro strategist Peter Tchir. “Policies and deals will take their turns driving markets.” On the plus side are indications of “some cooling” in the US tariff stance on China as well as the US budget getting going, but with the Fed unlikely to help as of now, “a lot has already been priced in,” he noted.

The funding spread — a measure of demand for long exposure through equity derivatives such as swaps, options and futures - has decoupled from the latest leg higher in stocks. “This suggests macro investors trimmed their equity exposure on the recent strength,” Goldman Sachs managing director John Marshall wrote in a separate note. He expects this week to be particularly volatile given the mid-week Federal Reserve meeting, where “commentary regarding June/July will be particularly important.”

Buying from systematic investors is growing steadily and lends a supportive stance to the rally. Goldman Sachs traders noted that buying from systematic macro investors climbed to $51 billion last week, with $57 billion in purchases expected for this week. “The size of the overall buying is not trivial, but also not bigger, because if signals are flipping back and forth quickly it can reduce the immediate pace of the flows, and the volatility environment is higher than before,” they wrote.

Other supporting buying flows during the bounce are arguably looking more stretched. JPMorgan Chase & Co.’s Tactical Positioning Monitor is currently in a neutral state, with one-week change showing a “moderate positioning increase.”

Hedge fund gross leverage rebounded month-over-month and is now at the 96th percentile on a long-term basis. Meanwhile Mom and Pop kept add more risk. “Retail saw strongest month of buying on our data since 2017, buying both single stocks and ETFs,” according JPMorgan’s Positioning Intelligence team lead by John Schlegel.

—With assistance from Wojciech Moskwa.