The S&P 500 extended its fall to nearly 20% from its January record high on Thursday before bouncing over the weekend, with continued high inflation approaching a bear market amid worries about a more aggressive Federal Reserve interest rate hike that could weaken the economy. The fall in the tech-heavy Nasdaq composite was even greater, down 24.5% year-to-date.
Despite these losses, many widely followed indicators still do not show the widespread panic, supercharged volatility and complete pessimism that has emerged at the bottom of the market in the past – a potentially alarming signal for those looking to step in and buy cheap after the recent sell-off. Stock
Indeed, as stock prices rose on Friday, some epidemic-era favorites such as ARK Innovation ETF are showing double-digit percentage gains, albeit from disappointing levels.
“I don’t think we’re out of the woods anytime soon,” said Mark Hackett, head of nationwide investment research. “That being said, investors’ expectations have been dramatically reset.”
For example, the Cboe Instability Index, known as the “Wall Street Fear Measure”, is now hovering around 30, compared to the long-term average of 18. However, past market bottoms have matched 37 levels on average, and the VIX rose above 80 during the March 2020 sinking of the Covid-19 fuel market, after which the S&P 500 more than doubled below its unprecedented Fed stimulus.
Randy Frederick, vice president of Charles Schwab Trading and Derivatives in Austin, Texas, is looking for a one-day spike at some level, at least in the mid-40s, “where you actually see panic.”
“If I don’t see panic … it could mean we’re not down yet,” he said.
Hackett, nationwide, is looking at alternative trading for a spike in the ratio between putts, which are usually bought for poor protection and calls.
“On most of these indicators, put / call is one of them, already historically very bad,” Hackett said. However, he said, “We have not seen that surrender where everything is turning red.”
Meanwhile, analysts at BofA Global Research shared their “Capitalization” checklist on Friday, showing that while some indicators, such as investor cash, hit critical areas, others did not meet past sell-off levels.
“Fear and hatred suggest stocks prone to the upcoming bear market rally but we don’t think the final low has 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 monthly U.S. retail sales reports.
Whether or not there are clear signs of a downturn, stock sentiment may also be influenced by market expectations of how aggressively the Fed will have to raise interest rates for the rest of the year. The central bank has already raised 75 basis points since March and indicated that a pair of 50 basis point increases could come in its next two meetings.
Robert Pavlik, senior portfolio manager at Dakota Wealth Management, said, “I think you have to wait for at least two or three 50 basis-point rate increases before you start to see any real signs of people coming back.”
Instead of looking for the signs below, Willie Delwich, an investment strategist at market research firm All Star Charts, focuses on clear indications that stocks can mount a sustainable rally.
Among the issues he looks at are whether the New York Stock Exchange and Nasdaq collectively have a 52-week high versus a lower net number from the current negative level to a positive one. Another is the percentage rate of S&P 500 stocks that have created 20-day highs that have risen from less than 2% to at least 55% in the last count.
“Right now a lot of people are trying to pick a bottom and it’s proving futile and expensive,” Delwich said. “It’s a risk-free environment … moving to the sidelines, letting instability play out, makes a lot of sense to investors.”