Wall Street Week Ahead: Signs of market bottom are leaking to investors after a sharp sell-off

Wall Street Week Ahead: Signs of market bottom are leaking to investors after a sharp sell-off


NEW YORK – Investors are studying a number of indicators to suggest how far a brutal US stock slump could continue, with some indications that the stock slump may not be over.

The S&P 500 extended its decline to nearly 20% from a record high in January on Thursday before the rebound at the end of the week and approached a bear market peak amid fears that persistently high inflation would trigger a more aggressive Federal Reserve interest rate hike that could undermine. economy. The decline was even steeper for the technology-intensive Nasdaq Composite, which fell 24.5% year on year.

Despite these losses, many widely monitored indicators do not yet show the ubiquitous panic, overcrowded volatility and outright pessimism that have emerged in past market days – a potentially worrying signal for those looking to enter and buy cheaply after the last sale. stocks.

Indeed, stocks rose sharply on Friday, with some pandemic favorites such as the ARK Innovation ETF showing double-digit percentage gains, albeit from low levels.

“I don’t think we’re out of the woods in the near future,” said Mark Hackett, head of investment research at Nationwide. “As has been said, investors’ expectations have changed dramatically.”

For example, the Cboe volatility index, known as the “Wall Street Fear Measure”, is now around 30 compared to a long-term median of almost 18. However, past market days coincided with an average level of 37 and the VIX climbed above 80 in March 2020 during a market downturn. triggered by COVID-19, after which the S&P 500 more than doubled from its lows against the Fed’s unprecedented stimulus.

Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas, is looking for a one-day rise to at least the mid-1940s as a probable “where you really see panic.”

“If I don’t see the panic … it could mean we’re not at the bottom yet,” he said.

Hackett of Nationwide is monitoring options trading in order to sharply increase the ratio between puts, which are usually bought to protect against a decline, and cally.

“Most of these indicators, one of which is put / call, are historically very bad,” Hackett said. But he said, “We haven’t seen the surrender, where everything flashes red.”

Meanwhile, analysts at BofA Global Research shared their “surrender” checklist on Friday, which showed that while some indicators, such as investors’ money, hit critical areas, others did not reach the level reached during the peak of past sales.

“Fear and disgust suggest that stocks are prone to an immediate bear market recovery, but we do not think the final lows have been reached,” they wrote.

Next week, investors will focus on earnings results from major retailers, including Walmart Inc. and Home Depot Inc., as well as a report on monthly U.S. retail sales.

Whether there are clear signs of a bottom or not, stock sentiment could also affect market expectations as the Fed will have to raise interest rates for the rest of the year. The central bank has raised rates by 75 basis points since March, suggesting that a few increases of 50 basis points may come at its next two meetings.

“I think you’ll have to wait at least two or three rate increases of 50 basis points before you see any real signs that people are coming back,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management.

Rather than looking for signs of a bottom, Willie Delwich, All Star Charts’ market research investment strategist, focuses on clearer indications that stocks may be growing steadily.

Among the factors it monitors is whether the net number of 52-week highs versus lows on the New York Stock Exchange and the Nasdaq together will turn positive from current negative levels. Another is the percentage of S&P 500 shares that reached 20-day highs, which rose to at least 55% from less than 2% at the last census.

“Too many people are trying to pick the bottom right now, and it’s proving futile and expensive,” Delwiche said. “This is a risk-free environment … Moving to the margins, letting volatility subside, makes a lot of sense for investors.”

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