When we last looked at what Nomura's increasingly bearish quant, Masanari Takada, deemed were the key underlying market technicals on Monday, he said that with CTAs now shorting the Russell 2000, and "it was only a matter of time before they turned short on the S&P500" although judging by today's aggressive short squeeze, that day is probably not today.

Nevertheless, in his latest daily note sent to clients overnight, Takada writes that "it is clear that economic growth momentum in the US is slowing, and the index result was not favorable enough to allay the concerns of market participants." More importantly, most speculators, while cautious, have not yet pivoted to proactively selling off US stocks; they seem to be waiting to see what happens next.

However, today's action notwithstanding, Takada picks up where he left off last night, and warns that trend-following CTAs "may have started tentatively shorting S&P 500 futures" even if as he admits, he still "does not have enough evidence at the moment to say whether these CTAs have swung to shorting to a significant degree, but we think that the short strategies of systematic traders in the S&P 500 should become clear over the next two or three trading days." As a result, "the S&P 500 could end up coming under selling pressure, and conditions look ripe for volatility to be high."

So while refusing to time the bearish inflection point, Takada writes - somewhat redundantly - that investors in global equities in general and US equities in particular are becoming more risk-averse, as "present conditions encourage investors—especially speculators—to make bear trades."

However, when looking further ahead, he notes that "the future of the present risk-off mood comes down to who throws in the towel first."

On one hand, sentiment could improve in short order if the Fed were to succumb to the pressure to lower interest rates and proceed to do so at the June FOMC meeting. Such a move by the Fed could prompt a stock market rally, not least due to the bear squeeze it could put on CTAs' US equity short positions.

Needles to say, we are seeing this squeeze in play today following Powell's dovish commentary this morning, which hinted that not only are rate cuts being contemplated, but the Fed's "unconventional" policies may once again come into play.

While it is difficult to get a read on which way Fed officialdom is leaning overall, recent comments by individual Fed officials make us think that a June rate cut is gradually becoming more likely.

So while the fate of the current mini swoon has yet to be decided, predictably by the Fed, here Takada makes an ominous observation, cautioning that even if the Fed were to make a precautionary rate cut that leads to a bear-squeeze rally (as in the first scenario above), he "sees another pattern developing that should give investors pause."

Specifically, what he sees is that the trend in US stock market sentiment is starting to resemble the pattern observed around June 2008, in the run-up to the Lehman crisis. He explains:

"We see numerous points of similarly between the trend in sentiment now and that before the Lehman collapse, in terms of both the extent of deterioration in sentiment and the timing."

This is shown in the chart below...

... and while Nomura admits that the correlation could turn out to be coincidental, if one goes by the pattern in sentiment, he sees the possibility of "a vicious bear-squeeze rally in US stocks from mid-June through early August", one which may have started two weeks early thanks to today's tremendous ramp higher in stocks, however this squeeze "could be followed by a massive sell-off in mid-August through early September", even if that is not the quant's main forecast scenario for now.

Speaking to Bloomberg, Takada said that “we are probably at the point after the big second wave,” comparing the sell-off of December 2018 with that of January-March 2008, "and before the final big wave. That’s why any positive surprises are necessary as soon as possible for the market sentiment to deviate from such an ominous pattern."

The question then is whether a rate cut, which is increasingly being priced into the market which anticipates as much as 3 rate cuts by the end of the year, is seen as a "positive surprise", or whether it would be in keeping with the historical pattern, where a rate cut has signaled the start of each of the past 3 recession. If so, a June rate cut would indicate a recession starting as early as September. In which case the Lehman case study, and Takeda's warning of an early September market crash, may be right on target if that's when the market finally realizes that the longest US economic expansion of all time is ending.

Of course, not everyone agees. Alberto Tocchio, CIO of Heron Asset Management who in April correctly forecast the upcoming correction in stocks, said the current market situation is far from that of 2007. As such, he has been buying stocks this week and believes that dovish global central banks and stable economic data are deterring bearish sentiment.

“I am still a great believer that in an asset class allocation, equities are the most rewarding of all, but they need to be traded as we will experience high volatility from now to year’s end,” said Tocchio. “We are not yet there for a full buy signal but it is probably too late to start thinking about selling now.”

Ultimately, it will be up to the Fed to navigate the market through increasingly precarious waters, where if the Fed refuses to cut may be just as bad as starting an easing cycle, as the next question will be: is this time different, or are rate cuts the official start of the recession.

For his part, Takada concludes that "the Fed could decide not to act now, in which case investors with longer investment horizons might be pressed into reducing their equity market exposure. If that were to happen, a bear market much like that of December 2018 could take shape."