The oversold bounce
The Dow Jones Industrial Average fell more than 700 points on Monday, its worst day since October of last year. The increase in Covid-19 cases, as well as the highly contagious delta variant, has raised concerns about the economy’s recovery.
Some stocks fell more than 10% below their 50-day moving average, indicating that the stock was potentially oversold.
Using data from Finviz.com, analysts examined the stocks that fell below that threshold and identified the names that analysts believe will rebound by 30 percent or more. From that pool, we identified the stocks that are popular among the majority of analysts.
If the stock sell-off subsides and concerns about the delta Covid variant subside, these stocks could be among the first to recover.
The majority of stocks in screen are from the sectors that were hardest hit by Monday’s sell-off: energy and travel.
In comparison to the other stocks on the list, Valero Energy fell the most below its 50-day moving average. According to Finviz.com, the energy name fell 21% below the cutoff. Analysts on average believe the stock will rise 51 percent in the next year.
Based on its average target price, Alaska Air has the most implied upside of the cohort. After falling 18 percent below its 50-day moving average on Monday, Wall Street believes the airline’s stock can rise by 55 percent in the next 12 months.
Analysts screen also shows Semiconductor Microchip Technology. The stock fell 11.2 percent below the key level on Monday, but analysts predict a 33 percent rally in Microchip shares.
Marathon Petroleum, Southwest Airlines, and Diamondback Energy are also on the list.
A volatile summer
Stocks rebounded Tuesday after a sharp sell-off on Monday, as investors worried that Covid variants would harm the economy’s reopening. Many of the worst-hit stocks recovered on Tuesday, with cyclicals such as airlines, industrials, and bank stocks all gaining.
Some strategists believe the market is entering a volatile period in which a deeper pullback will not end the bull market.
“When you get this kind of sell-off that is virus-related and macro-related concerns, the defensive playbook is the playbook that works right now,”. “Even though yields are beginning to stabilize, the virus is likely to remain a source of concern for several weeks. Even if that occurs, there is a significant amount of underlying inflation.”
After falling 725 points on Monday, the Dow rose more than 600 points Tuesday afternoon. The S&P 500 increased by 1.6 percent. The benchmark 10-year Treasury yield was at 1.20 percent, reversing a move that had taken it to a low of 1.12 percent early Tuesday.
“We’ve had days like this before,” said George Goncalves, MUFG’s head of US macro strategy. “We’re in a high-volatility environment… August is not a good month. Whenever there is a bond rally in July, there is usually another one in August.”
At the beginning of July, the 10-year yield, which moves in the opposite direction of price, was as high as 1.48 percent. Bond market experts expected rates to rise, but they instead fell due to a variety of concerns, including fears that the Federal Reserve would end its easing policies too quickly.
According to Emanuel, the S&P 500 could fall by more than 5%, but it could also fall by 10% or more. He believes the S&P 500 will reach 4,000 or even the 200-day moving average, which is currently at 3,899, before the end of September.
Some strategists predicted a correction, which would imply a 10% or greater drop, but the market has repeatedly shrugged off shallower pullbacks as dip buyers rushed in.
“I believe what we’ve seen here are the early warning signs of a correction that we’ll most likely see… Matt Maley, equity strategist at Miller Tabak, stated, “in late August, September, and October.” “We’re beginning to see some indications of it. The fact that the semiconductors can’t seem to break free is cause for concern.”
Stock investors have been paying close attention to the unusual rise in the 10-year yield, which is expected to reach 2% or higher this year. Until recently, when yields were falling, tech and growth stocks performed better. However, falling yields are now causing concern for stocks because investors see the bond market as signaling the possibility of a global growth slowdown.
Even as the 10-year yield held steady on Tuesday, market chatter remained focused on whether the 10-year yield had bottomed or if it could fall further to 1 percent, a level strategists say is unlikely but would frighten the stock market.
“It’s not a pretty chart, the way the momentum is depicted. It’s a bit like catching a falling knife. The 10-year yield is “extended,” according to Goncalves. “It would not be surprising to see it return to 1.20 percent. Is that the end of the story? I’m not going to make that decision. This market isn’t based on fundamentals. I believe it is almost finished. This is a market that overshoots.”
Aside from the bond market, strategists have been watching the Russell 2000, which has been falling recently and was down as much as 10% from its high during Monday’s sell-off. The index outperformed on Tuesday, gaining more than 2% after falling 1.5 percent on Monday.
“Small caps are ground zero for this entire labor market dynamic,” said Emanuel of BTIG. “They’ve been terrible after being the market leader for the first year of the rally. We continue to believe that the cyclical sectors — small caps, energy, and financials — are the ones to own when there is a sufficient amount of fear in the market.”
Emanuel believes that both small caps and transports, which have also been selling off, must reach a bottom. “We’re going to want to see a tech sell-off in terms of capitulation,” he said, adding that the sector’s gains are once again overly concentrated in a few big names.
Emanuel stated that he has been advising investors to use options to both hedge against a sell-off and capture upside. He is also interested in defensive stocks such as consumer staples and health care.
“We basically like a wide range of companies that can pass on higher prices to customers,” he explained. Coca-Cola, Altria, PepsiCo, and Procter & Gamble are among the BTIG companies.
Emanuel also stated his preference for Big Pharma in health care. “Basically, you have yield. “You have earnings certainty, and the stocks are cheap,” he said.
Johnson & Johnson was up more than 1% on Tuesday, while Pfizer was up more than 2%. Eli Lilly and Bristol-Myers Squibb were only 1% higher.