Not everyone is bearish: 4 reasons why stock markets could be on the cusp of a big rally

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Markets, traders and commentators have become used to central bank zero interest rate settings and quantitative easing dampening market volatility in the post-GFC world.

But the recent surge in volatility since August, which has taken daily trading ranges to the very top of anything seen in the past five years, has “rattled investors” says Brian Belski, chief investment strategist at BMO Capital Markets. That, Belski says, means “some are beginning to question the resiliency of US stocks”.

Belski is not persuaded by the bear case, however. Instead, he warns against “reactionary decisions (which) typically do more harm than good for investment returns”.

Rather, Belski and his colleagues Nicholas Roccanova and Nicholas Amicucci say:

Despite the surge in bearish prognostications since the market nosedived during August, everything in our fundamental, quantitative and macro work still suggests that US stocks should finish the year at higher levels, and by no means do recent developments alter our longer-term secular bull market stance.

Here are the 4 reasons why they retain their bullish bias:

Corrections

Our work suggests that the market just exhibited a classic correction in terms of price decline and duration. This bodes well for stocks since market performance turns around quickly following the end of correction periods.

Abnormal spikes in market volatility

Fortunately high levels of market volatility are typically short-lived and the market tends to respond strongly to the upside when it begins to subside.

Unusually bearish investor sentiment

Investor sentiment is one of the tried and true contrarian indicators based on our work, so extreme levels of bearishness should be a welcome sign for market performance.

Outperformance of early cyclicals

Despite recent market struggles some underlying trends have been positive. Specifically, early cyclicals have been outperforming late cyclicals by very wide margins and this typically leads to better market performance.

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