By Yasin Ebrahim
Investing.com — The midweek post-Federal Reserve rally on Wall Street was short-lived. The vendors returned a day later to carry out demolition work. Stocks suffered the biggest one-day loss since the pandemic and extended their losing streak to six weeks.
The is down 14% since the start of the year, the is 10%, has fallen 23%.
When big selloffs hit Wall Street, the debate over whether the market has bottomed isn’t far behind. But the market still hasn’t reached the “puke” moment that usually precedes a market bottom and signals that it’s safe for bulls to come out of hiding.
“For a downside capitulation, you need to have that ‘vomit’ in the market…that moment when it’s time to buy, but you won’t want to,” said chief market strategist David Keller at StockCharts. com to Investing.com in an interview earlier this week.
This moment of ‘vomiting’, a precursor to investor capitulation, has yet to happen as there is still too much optimism and speculative betting in the market as well as lingering hope that the Fed might not not be ready to do anything. to curb inflation even if it means causing a recession.
“Investors are still too excited to find a floor and get the next leg higher, you need it to completely evaporate…you need people to think that the last thing you want do is buy stocks,” Keller added. “That usually ends up happening when the market bottoms out.”
Identifying a market bottom is not an easy task. But history suggests that there are a few key factors to watch: price action, market breadth and investor sentiment.
Price action, the movement of a stock’s price over time, has recently shown that optimism fades as upside moves, or volume, in stocks on bullish days are lower to those down days, suggesting that investors’ conviction to buy the downside is fading.
Investor sentiment on stocks, meanwhile, rebounded from hitting an all-time low last week, but remains below the all-time average, according to the latest AAII sentiment survey, released on Thursday.
“Bullish sentiment, expectations that stock prices will rise over the next few months, jumped 10.4% to 26.9% last week,” the AAII sentiment survey showed. But that big move wasn’t enough to keep optimism from staying below its all-time average of 38% for the 24th straight week.
While price action and sentiment show that stocks are on the verge of a near-term bottom, the breadth of the market, the movement of the individual stocks that make up the index, continue to signal further speed bumps ahead.
In a bear market, market breadth tends to be negative, with more stocks falling than rising. This negative scenario is exacerbated when markets are bottoming out, when a mental “sell it all” usually occurs. But there are still corners of the market that are holding up well, suggesting sellers aren’t ready to surrender.
“The challenge right now is that you really haven’t seen a completely bombed-out market scenario, where everything has gone down, there are still things that are holding up pretty well like energy stocks,” Keller said.
“It’s also a lot like earlier in a cyclical bear market where the negative magnitude that all of a sudden recognizes that people are in the acceptance phase and recognizes that the markets are really deteriorating,” Keller added. “In 2008 and 2009, markets fell for another six to nine months before the eventual bottom and stocks.”
Investor confidence in the Fed’s ability to rein in inflation without tipping the economy into a recession will also play a role in the market bottoming process.
“The idea that the Fed can manage inflation and raise rates consistently without having a negative impact has started to shake. When confidence in the Fed’s ability to manage this is low, it’s not a bullish market environment,” Keller said. mentioned.
Others on Wall Street agree, but also point out that the risk of rewarding opportunities in stocks is starting to look attractive, as some recession risk is priced in.
“I think it is [market bottom] depends entirely on whether the economy goes into a recession or not, Rhys Williams, chief strategist at Spouting Rock Asset Management, told Investing.com in an interview Thursday.
“The risk-reward ratio is attractive as there seems to be a growing consensus that some sort of hard landing or recession is impossible to avoid. If this is avoided, there will be many benefits, but if not avoided, some of this [recession risk] is included in the price,” added Williams.