The Nasdaq lost 1.2% after its big rebound on Friday, while the Dow Jones gained 0.08%. Investors are still torn between the appeal of valuations that have become affordable, even very affordable, and the fear of a future filled with inflation, economic recession and shortages.

When the stock market declines, all investors are looking for the tipping point. That's why investors have developed a whole vocabulary of bearishness, which is supposed to provide milestones. We speak of a "correction" when stocks fall more than 10% before recovering. A correction that exceeds 20% becomes a bear market. In this type of situation, a capitulation market often occurs. This is the moment when investors' nerves give way and panic worsens an already well-established decline. We can also witness a "dead cat bounce", which is a kind of swan song -  a rebound followed by the continuation of the downtrend.

Over time, these milestones have also become anchor points. For example, investors are more likely to expect indexes to rebound just after crossing the -10% barrier, or the -20% barrier. This is a bit arbitrary since these levels are above all round numbers, but it makes it easier to imagine finding the low point and thus taking full advantage of the rebound (if it is not a dead cat jump, if you have followed correctly). Of course, if you are looking for the low point during a "correction" and it turns into a "bear market", you'll go straight to the floor below.

These periods come and go at regular intervals. They are part of the "shock cycle" described by US columnist Morgan Housel.

Panic is often a bad advice, because it increases considerably the risk for an investor to be in the wrong timing, which amounts to making stupid choices. Excessive pessimism occurs during events but also afterwards, because it is difficult to switch from one mental pattern to another. In the shock cycle, this is the period from when the investor thinks the bad news is permanent to when he denies the good news. But of course, determining the tipping point I mentioned at the beginning is probably the most complicated exercise. On the other hand, it is possible to measure the degree of irrational optimism or pessimism of investors. This is what the British bank Liberum has done, estimating that the US markets are currently 10% below what is rationally justifiable by the economic context.

The method of arriving at these figures is interesting. Liberum relies on the deviation between the performance of the stock market on a day-to-day basis and the performance of the market during the session. Indeed, research has shown that intraday prices are dictated by investors' emotions and biases, while post-trade prices are much more rational (and much less volatile) as they are more based on economic data. Or to put it simply, "returns that occur overnight reflect macroeconomic risk, while those that occur during the day reflect investor behavior," to quote one of the studies used by Liberum.

When the market is overly optimistic, intraday changes are systematically higher than overnight changes, as was the case in 2021. Since the beginning of 2022, it is the opposite, except during the March surge. At this stage, the gap is not quite as extreme as it was during the most violent episodes of the last decade, according to Liberum's model, which estimates that while a reversal is not yet on the agenda, the market's low point is getting closer. When you put it that way, it's almost like the best influencers in the financial twittosphere kicking in an open door, but in reality, it's a little more subtle than that. During previous violent downturns, the arrival near these deviation levels signaled a bottom.

 

 

Economic highlights of the day:

Several statistics in the United States, with retail sales and industrial production for April, then the NAHB housing index for May and business inventories for March.

The dollar is down to EUR 0.9489. The ounce of gold has rebounded to USD 1823. Oil rose again yesterday, with North Sea Brent crude at USD 115.12 per barrel and U.S. WTI light crude at USD 112.95, with a narrowing spread. The yield on 10-year US debt rallies a bit to 2.91%. Bitcoin is trading around USD 30,300.

 

On markets:

* Walmart lost 6% in premarket trading after lowering its annual profit forecast as the U.S. retail giant saw its margin increasingly impacted by high labor costs and inflation in the U.S.

* Twitter was down 3.5% in pre-market. Elon Musk announced Tuesday that his plan to buy Twitter for $44 billion could not go forward until the social network's chief executive, Parag Agrawal, provides public proof that "spam" accounts for less than 5% of the number of users.

* Berkshire Hathaway announced on Monday that it has increased its stake in Citigroup, McKesson and Paramount Global and that it has sold almost its entire stake in Verizon. The latter was down 1.4% in pre-market trading while Citi was up 4.7%.

* Home Depot raised its full-year revenue and profit forecast following strong first-quarter results driven by sustained demand. In pre-market trading, the U.S. home improvement specialist was up 4.2%.

* United Airlines raised its revenue estimate for the current quarter despite capacity cuts. The stock was up nearly 5% in pre-market trading.

* Tencent Music reported a 15% decline in quarterly revenue, in line with market expectations.

* Video game publisher Take-Two Interactive, the company behind the hit "Grand Theft Auto" franchise, reported a better-than-expected quarterly profit, putting it up 7% in pre-market trading.

* KKR will buy British energy company ContourGlobal for 1.75 billion pounds ($2.08 billion), the U.S. fund said Tuesday.

* Intercontinental Exchange announced Tuesday that it will sell its stake in securities settlement platform Euroclear Holding for 709 million euros to Caisse des Dépôts and Belgian state-owned holding company SFPI.

* Duke Energy - Activist investor Elliott Investment Management sold its stake in Duke Energy during the first quarter, a stock exchange filing released Monday shows.

 

Analyst recommendations:

  • Advance Auto Parts: Goldman Sachs adjusts price target to $247 from $261, maintains buy rating.
  • Advanced Micro Devices: Piper Sandler raised its recommendation to overweight from neutral. PT jumps 49% to $140.
  • Aspen Technology: : Piper Sandler adjusts price target to $159 from $170, maintains neutral rating.
  • Camden Property: Goldman Sachs downgrades to neutral from buy. PT up 9.6% to $158.
  • CarMax: Evercore ISI adjusts price target to $105 from $85, maintains in-line rating.
  • Equity Residential: Mizuho Securities raised its recommendation to buy from neutral. PT up 13% to $84.
  • Essex Property: Goldman Sachs  raised its recommendation on Essex Property Trust Inc. to buy from sell.
  • Gilead Sciences: Piper Sandler adjusts price target to $69 from $73, maintains neutral rating.
  • Global-E Online: KeyBanc adjusts price target to $25 from $45, reiterates overweight rating.
  • J.B. Hunt: Benchmark Company initiated coverage with a recommendation of buy. PT up 24% to $215.
  • Monday.com: Piper Sandler adjusts price target to $200 from $250, reiterates overweight rating.
  • Palo Alto Networks: KeyBanc adjusts price target to $610 from $729, reiterates overweight rating.
  • PBF Energy: J.P. Morgan upgrades to neutral from underweight. PT up 9.5% to $34.
  • Shake Shack: Raymond James upgrades to market perform from underperform.
  • Teva Pharmaceutical Industries: BofA Securities upgrades teva pharmaceutical industries to neutral from underperform; price target is $9.
  • Unilever: Moves from hold to sell targeting GBp 3400.
  • Upwork: Stifel downgrades to hold from buy, adjusts price target to $20 from $30.
  • Vodafone: Goldman Sachs maintains a Buy rating.
  • Wix.com: Barclays lowers price target to $68 from $105, maintains equalweight rating.
  • WorkDay: Morgan Stanley adjusts price target to $320 from $340, keeps overweight rating.