Reuters

Analysts at Bank of America listed a number of reasons why the recent gain in stocks is actually a bear-market rally that is about to end, and said stocks are going to re-test their March 23 lows.

Negative oil prices and a flood of poor earnings reports from S&P 500 companies are just a couple reasons this bear-market rally has similarities to the run-ups to previous market crashes and is about to end.

The swift drop in market volatility, as measured by the VIX, is indicative of the market "pricing in an optimistic recovery path compared to what economic reality holds in store," Bank of America said.

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Analysts at Bank of America are cautioning investors that the recent 30% rally in stocks is actually just a bear-market rally in disguise.

The bank expects that the surge is currently running into resistance and will roll over before retesting the March 23 lows, if not making new ones, it said in a note Tuesday. A return to the market lows would represent a decline of 18% from yesterday's closing price in the S&P 500.

The bank said that the market will have a difficult time sustaining valuations near their pre-coronavirus peaks given that in only the second week of US earnings season, 80 companies have withdrawn their guidance, 20 companies have cut their dividends, and 60 companies have suspended their buybacks.

Other factors contributing to the market call include oil prices turning negative for the first time in history. The bank also cited "the potential outflows in equities from Pension or other balanced fund rebalancing due to near record outperformance of stocks over bonds this month (the opposite of what happened last month)."

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Bank of America noted that following the path of bear-market rallies found in 1987, 2002, and 2008, implies that the S&P 500 could stall out in the 2,750 to 2,960 range. The index closed at 2,874 last Friday.

BofA Global Research

Finally, with 20% of S&P 500 companies reporting earnings this week, economic reality is about to set in and a further decline in stocks will unfold, the bank said. The swift drop in market volatility, as measured by the VIX, is indicative of the market "pricing in an optimistic recovery path compared to what economic reality holds in store."

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