Markets make a strong rebound with some analysts believing that the bottom could be already in. Banking giants make strong gains on Tuesday.

On Tuesday, July 19, all three US stock indices witnessed a strong rally as traders showed confidence ahead of the corporate earnings report. Many traders on Wall Street believe that the bottom could be already in and a strong earnings season might lead to markets resuming the uptrend.

On Tuesday, the Dow Jones Industrial Average (INDEXDJX: .DJI) was up 2.43% or 754 points closing at 31,827 levels. Similarly, the S&P 500 (INDEXSP: .INX) gained 2.76% or 105 points ending at 3,936 levels. The tech-heavy Nasdaq Composite (INDEXNASDAQ: .IXIC) registered over 3% gains ending at 11,713 levels.

For the first time since April 2022, all three indices closed above their 50-day moving averages. Since the low of June 16 last month, the broader stock market has gained 7.5%.

This sharp rebound is causing investors to bet that the bottom might already be in after steep declines in the first half of 2022. Kim Forrest, founder and chief investment officer at Bokeh Capital Partners told CNBC:

“Both investors and the companies were expecting hot inflation, so companies talking about hot inflation having happened in that second quarter was not a surprise at all. What was a surprise was that they were able to manage through it well.”

Stock Allocation the Lowest Since 2008

Bank of America (NYSE: BAC) conducted a survey last week that showed that investors’ sentiment has worsened to a great extent on Wall Street. This usually leads to a relief rally in the market. The BoA survey also mentions that participants’ bearishness suggests that sellers have been washed out. Thus, the stocks may rise from here.

The BoA survey also noted that the allocation to the stocks has been the lowest since October 2008. On the other hand, the cash holding has been the highest since 2001. Bank of America’s chief investment strategist Michael Hartnett said: “Fundamentals poor but sentiment says stocks/credit rally in coming weeks”.

A pullback in the USD has aided the rally, especially for the tech companies that have large portions of foreign sales.

Market Pessimism Continues

Not all analysts are bullish on the trend reversal and many believe this to be just a bear market rally. In a note on Tuesday, Wedbush analyst Kevin Merritt wrote:

″[While] I acknowledge sentiment is bad and we could see a large, tactical rally, I am currently more concerned about protecting downside than missing upside, in the aggregate”.

In this corporate earnings season, banks have posed a strong show! On Tuesday, Goldman Sachs Group Inc (NYSE: GS)s jumped 5.6%, Wells Fargo & Co (NYSE: WFC) gained 4.2% and Bank of America gained 3.7%. “Trading is likely to remain very choppy, with more bear market rallies, in the months ahead,” said Wolfe Research’s Chris Senyek.

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