Written by Yasin Ebrahim
Investing.com – The rally after the Federal Reserve in the middle of the week on Wall Street was short-lived. The vendors returned a day later to do the demolition work. The stocks suffered the biggest one-day loss from the pandemic and extended their series of losses to six weeks.
The decline is 14% to date, 10%, down 23%.
When big sales hit Wall Street, the debate over whether the market has hit rock bottom doesn’t lag far behind. But the market has not yet reached the moment of “vomiting” that usually precedes the bottom of the market and signals that it is safe for the bulls to come out of hiding.
“To capitulate with the bad side, you have to have this ‘vomit’ on the market … the moment it’s time to buy, but you won’t want to,” chief market strategist David Keller of StockCharts.com told Investing.com in an interview earlier. this week.
This moment of ‘vomiting’, a precursor to investor capitulation, has yet to take place as there is still too much optimism and speculative bets splashing in the market, as well as hope that the Fed may not be ready to do whatever it takes to curb inflation even if it means causing a recession.
“Investors are still too excited to find the bottom and drive to the next stage more, you need it to completely evaporate… you need people to think the last thing you would ever want to do is buy stocks,” Keller added. “It usually ends when it gets to the bottom of the market.”
Identifying the market bottom is not an easy endeavor. But history suggests that there are several key factors to look at: price performance, market breadth, and investor sentiment.
Price action, stock price movements over time, has recently shown that optimism fades as movements are higher, or volume, in stocks on days of growth lower than those on days of decline, suggesting investor belief to ‘buy decline’ is fading.
Investor sentiment on stocks, meanwhile, has returned after reaching its lowest level in history last week, but remains below the historical average, according to the latest AAII Sentiment Survey, released Thursday.
“The bullish mood, expectations that stock prices will rise over the next few months, jumped 10.4% to 26.9% last week,” the AAII Sentiment Survey found. But the big move was not enough to prevent optimism for 24 weeks in a row from staying below the historical average of 38%.
While price action and sentiment show that stocks are on track to reach a short-term bottom, the breadth of the market, the movement of individual stocks that make up the index, continues to record new leaps forward.
Against the background of a bear market, market width is usually negative, with more stocks falling than advancing. This negative scenario is exacerbated when markets are in the bottom-up phase, as mentally it usually continues to ‘sell everything’. But there are still parts of the market that are holding up well, suggesting sellers aren’t ready to give up.
“The challenge now is that you haven’t really seen the full bombardment scenario of market breadth, where everything has fallen, there are still things that are actually holding up pretty well like energy supplies,” Keller said.
“This also looks like it used to in the cyclical bear market where the negative latitude suddenly confirms that people are in the acceptance phase and recognizes that the markets are really getting worse,” Keller added. “In 2008 and 2009, markets fell another six to nine months before the final bottom and stocks.”
Investor confidence in the Fed’s ability to curb inflation without dragging the economy into recession will also play a role in the market bottom process.
“The idea that the Fed can manage inflation and raise rates consistently without negative impact has begun to falter. When confidence in the Fed’s ability to manage this is low, it’s not a bullish market environment,” Keller said.
Others on Wall Street agree, but also point out that the risk of rewarding opportunities in stocks is starting to look appealing as part of the risk of a recession turns into stock prices.
“I think that [market bottom] it all depends on whether the economy is going into recession or not, Sputing Rock Asset Management chief strategist Rhys Williams said in an interview with Investing.com on Thursday.
“The risk of a reward is attractive because there seems to be an increased consensus that some difficult landing or recession is impossible to avoid. If this is avoided, there will be many positive sides, but if it is not avoided, some of this [recession risk] has a price, ”Williams added.