Analysis: Buy the rebound? Investors watch valuations, technical levels to decide

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A trader looks at his chart while working on the floor of the New York Stock Exchange on July 8, 2014. REUTERS / Brendan McDermid / File Photo

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NEW YORK, Jan. 12 (Reuters) – As stocks try to recover from a sell-off, investors are watching various metrics to decide whether to buy the rally or prepare for further declines.

The tech-heavy Nasdaq Composite Index (.IXIC) closed 1.4% higher on Tuesday, a day after falling more than 10% from its closing high on November 19 in intraday trading before trading. stand up at the end of the session. Read more

Yields on the benchmark 10-year US Treasury Index rose 20 basis points this month in anticipation of a more hawkish Federal Reserve and are near their highest level since January 2020. Shares of Growth and technology can be particularly sensitive to higher returns as they threaten to erode the value of future cash flows.

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“We are entering a period where you will see some really dramatic leadership shifts and volatility” in the equity market as the Fed prepares to hike rates, said Liz Ann Sonders, chief investment strategist at Charles Schwab.

A review of historical valuations shows that there could be more declines ahead for tech and growth stocks.

Growth companies’ price / earnings multiple is 15 points higher than that of so-called value stocks, compared to a long-term average of six points, wrote Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, in a report. recent.

The Russell 1000 Growth Index (.RLG) is down 3.8% year-to-date, while the Russell 100 Value (.RLV) which tracks stocks of banks, energy companies and others relatively cheap and economically sensitive stocks, is up 1.4%. .

UBS expects the market as a whole to rise, with a year-end price target of 5,100 on the S&P 500, some 8.2% above its closing level on Tuesday.

Still, “investors will need to be nimble in 2022 and be aware of any disproportionate exposure they may have to growth stocks,” Marcelli wrote.

Others are less optimistic. Analysts at BofA Global Research said that the nearly 2% drop recorded by the S&P 500 (.SPX) in the first five trading days of January bodes poorly for its performance for the remainder of the year.

The S&P 500 ends the year up almost 75% of the time, offering an average return of around 11%, when the first five trading sessions of the year are up.

When the first five sessions are down, the year is up only 52% of the time, averaging 1.77% return, BoFA’a analysts said in a report. The S&P 500 – where tech-focused stocks are heavily weighted – rose almost 27% in 2021 and is down 1.1% so far this year.

Cantor Fitzgerald analysts, meanwhile, have warned that a “massive sell-off is coming” in the face of a more hawkish Fed, calling for a pullback of 10% or more by the end of February.

Alarming signs include a sharp rise in global bond yields which has blunted equities’ attractiveness and an 80% jump in margin debt among retail investors over the past two years, they said in a recent memo.

“Exposure to equities is at historic levels, which means that a pullback will overshoot on the downside,” wrote Eric Johnston, the company’s head of equity derivatives and cross-assets.

Bespoke Investment Group analysts are monitoring technical levels. They noted that exchange-traded fund QQQ (QQQ.O), which tracks the Nasdaq 100, closed in “extremely oversold” territory on Friday, a sign that the index could hit a near-term low. Since 1999, the Nasdaq 100 has gained 4.9% in the six months following an “extremely oversold” reading, according to Bespoke.

Jim Paulsen, chief investment officer at Leuthold Group, believes strong earnings expected over the next two quarters should make any sell-off in the market short-lived

“Whether a correction occurs now or later this year, it will likely be met by strong company fundamentals,” he said.

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Reporting by David Randall; Additional reporting by Ira Iosebashvili; Editing by Ira Iosebashvili and Lisa Shumaker

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