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It's time to 'play defense' with stocks experiencing a classic bear-market rally, Wells Fargo warns
Stocks won't exit the bear market until the Federal Reserve's last interest rate hike, according to Wells Fargo.
Investors need to be cautious despite major indices' recent gains, CIO Darrell Cronk told Bloomberg TV.
"This very much looks like a bear market rally… you've got to play defense," Cronk said.
It's time for investors to get defensive and consider jumping out of stocks, which look caught in the middle of a bear-market rally, according to a Wells Fargo investment chief.
Darrell Cronk told Bloomberg TV he's skeptical about how well equities will perform over the rest of 2022, even though the S&P 500 has climbed more than 15% 什么是熊市（Bear Market）？ since hitting a low for the year in June.
"This is the 什么是熊市（Bear Market）？ question: Is this a bear market rally or the start of a new bull?" Cronk, CIO for Wells Fargo Wealth and Investment Management, said on Friday. "什么是熊市（Bear Market）？ This to us very much looks like a bear market rally."
"People forget that as bear markets get older, the bear market rallies get larger. This is the largest one we've seen, we've had six S&P 500 rallies during this bear of 7% or greater."
He believes the S&P 500'什么是熊市（Bear Market）？ s recent rally isn't sustainable, given the US benchmark has failed since April to break above its 200-day moving average. If stocks rise or fall through this key resistance level, it's seen as a change in long-term 什么是熊市（Bear Market）？ 什么是熊市（Bear Market）？ direction.
"The fact that we've failed off the 200-day to us still says that you've got to play defense," Cronk said — suggesting they pivot away from stocks, and into less risky and volatile markets such as bonds or cash.
The Wells Fargo CIO said bear markets don't end three things happen: housing market forward indicators hit a bottom, earnings estimates fall significantly or trough, and the Federal Reserve is on the verge of stopping its interest rate hikes.
"You've got to get closer to the Fed being at or within sight of their last interest rate hike," he said. "We think we're still probably at least six months away 什么是熊市（Bear Market）？ from that."
"So, bear market rally — play defense here from a risk standpoint," Cronk said.
Markets have gained thanks to some investors' expectations that the Fed will pivot to start cutting interest rates soon. But Wall Street strategists have warned that the US central bank's current hiking cycle won't end until 2023.
Analysts at Goldman Sachs, Bank of America, and HSBC all said last week that the Fed will likely continue to hike until nominal rates are at 4%, around 150 basis points above their current level.
Are We Seeing the Failure of a Bear Market Rally or Just a Healthy Pullback?
Stocks are set to gap lower to start the week. It is not a big surprise that the market is finally undergoing corrective action after a fast and furious run, but the billion-dollar question is how far it will go. Is this just a reset that will set the stage for another push higher, or is it the failure of a bear market rally 什么是熊市（Bear Market）？ that the pessimists have warned us about?
The good news is we don't need to answer that question today, but we do need to increase our vigilance and be ready in case the selling pressure accelerates. The S&P 500 can pull back to 4,160 or so without doing major technical damage, but such a move would cause some pain and there likely will be some rotational action that is going to be harder on sectors such as growth, biotechnology, small-caps and technology.
The thing that is particularly interesting about the market right now is how quickly the narrative is shifting. During the big run off the June lows, the narrative was that the market had already priced in the worst and that it could handle a hawkish Fed. There was increased optimism that the strong labor market would provide enough strength to withstand a series of rate hikes and avoid a recession. The drop in energy and commodity prices also provided hope that inflation had peaked.
Last week the narrative started to become less positive. The Fed has made it clear that it is not likely to pivot to a more dovish stance very quickly, and there is increased debate over whether the unemployment rate needs to increase in order to effectively deal with inflation.
Some bulls contend that there has never been a bear market bounce of this magnitude that did not produce a bottom. We shall see, but we have never had economic conditions similar to this at this stage of the market cycle. I have little confidence that there is a historical precedent for this market.
As I've been discussing, I have raised quite a bit of cash into the recent strength primarily because many stocks I favor have become technically extended and I am not seeing many good entry points. Even after a few days of weakness, it is still going to take more work for better charts to develop.
This is the time for caution. Don't be in a rush to put valuable capital back to work. If you are going to trade, 什么是熊市（Bear Market）？ then keep time frames short and don't forget that we are going to be dealing with negative seasonality for a while.
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What is a bear market?
The recent slide in stocks has pushed the S&P 500 perilously close to a bear market, Wall Street’s label for a sustained downturn in the markets that reflects serious pessimism about the outlook for the economy.
A stock or an index enters a bear market, at least by most conventional definitions, when it has dropped 20 percent from its last peak. After spending much of Friday below that threshold, the S&P 500 recovered and closed 18.7 percent down from its Jan. 3 high.
The Nasdaq composite, a benchmark that’s heavily weighted toward technology 什么是熊市（Bear Market）？ stocks, has been in bear market territory since early March.
The declines have come as investors grapple with the combination of the Russian invasion of Ukraine, which resulted in sanctions that severely limited gas supplies; global supply chain problems as the coronavirus pandemic grinds on; and an inflation problem that is prompting the Federal Reserve and other central banks to raise interest rates quickly.
The 20 percent trigger for a bear market — like the 10 percent trigger for what investors call a “correction” — is a somewhat arbitrary threshold. But it serves as a mile marker to show that investors have turned pointedly more pessimistic about the market.
There is skepticism about the use of the terms correction and bear market, whose precise definitions have been in use only since the 1980s. Corrections are not uncommon, with the last one having started in January of this year, one of nearly a dozen since 2000.
Some corrections don’t last very long, like one in 2018, which lasted less than two weeks. In some instances, stocks regained their previous peaks in a few months.