Stock market ‘dead cat bounce’ over, Morgan Stanley says

A bear destroys a
campsite.

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• The stock market may have bounced back following its sharp
  sell-off at the beginning of October, but Morgan Stanley says the
  selling is going to pick back up soon.
• The firm expects the S&P 500 to slide back below the
  200-day moving average, a key technical level. 
• Tread carefully in tech and consumer discretionary, Morgan
  Stanley warns.

The stock market may have bounced back following its sharp
drop at the beginning of October, but Morgan Stanley says
it’s time to buckle up because the “rolling bear market has
unfinished business with the S&P.”

“We think attempts to rebound were more short lived than
sustainable,” a Morgan Stanley team led by equity strategist
Michael Wilson said in a note sent out to clients on
Monday. 

“Recent price declines in crowded Growth, Tech, and Discretionary
have caused enough portfolio pain that we think most investors
are playing with weak hands. We are increasingly thinking a rally
into year end will be harder to come by as lower liquidity and
concerns on peaking growth weigh on the S&P and an investor
base in defense mode.”

The Morgan Stanley team hypothesized earlier this year that

a bear market in stocks may have already begun and that
earnings growth would deteriorate in the second half of the year
as the impact of President Donald Trump’s tax cuts began to
fade.  

Wilson and his team say they are looking for
the S&P 500’s 200-day morning average — which has been
tested a handful of times this year, but has held — to finally
give way. 

Simply put, the 200-day is an indicator traders use to determine
the overall trend of the market. The market is in an uptrend as
long as it’s above its 200-day, and it’s in a downtrend if it’s
below the measure.

So what can that mean for stocks? The benchmark index suffered
through a correction, or worse, the last two times it fell below
the key technical level.

In August 2015, the S&P 500 plunged 15% amid the
fallout from Greece’s default on an IMF loan
payment and  China’s “Black
Monday”, the day the country’s benchmark
Shanghai Composite index fell more than 8%. And
before that, the S&P 500 plunged into a brief bear market
after the US lost its “AAA” rating at the ratings agency
Standard & Poors. In both instances, the S&P 500 wouldn’t
make new highs for at least five months. 

If there is any comfort for investors, it’s that the firm said

earlier this year that it doesn’t think the 20% to 40%
stock-market plunge that has characterized the last three bear
markets will rear its head this time around. Instead, its sees
individual stocks and sectors coming under fire. Wilson’s team
says to tread carefully in two sectors, tech and consumer
discretionary.

“Given the high degree of cyclicality in both Tech and Consumer
Discretionary, we think their derating should be more in line
with the broader S&P 500, or another 6-8 percent,” they
wrote.

“Of course, that begs the question of whether the valuation for
the S&P 500 has fallen too far already. We don’t think so.”