The S&P 500 extended its decline to nearly 20% from its record January peak Thursday before the weekend rebound, approaching the cusp of a bear market amid concerns that persistently high inflation will push the Federal Reserve into more aggressive rate increases that could undermine . Economy. The declines were most sharp in the high-tech Nasdaq Composite Index, which is down 24.5% year-to-date.
Despite these losses, many widely followed indicators are yet to show the rampant panic, extreme volatility and outright pessimism seen at previous market lows – a potential sign of concern for those looking to step in and buy cheap after the recent sell-off in Stores.
In fact, stocks rose on Friday, as some pandemic-era favorites such as the ARK Innovation ETF showed double-digit gains, albeit from lower levels.
“I don’t think we’re out of the woods yet on a near-term basis,” said Mark Hackett, head of investment research at Nationwide. “However, investor expectations have been significantly reset.”
For example, Cboe’s volatility index, known as the “Wall Street Fear Barometer,” is now hovering around 30 compared to a long-term average near 18. However, previous market lows coincided with the average level of 37, and the VIX climbed just over Above 80 in March 2020 during a market downturn fueled by COVID-19, after which the S&P 500 more than doubled from its lows on the back of unprecedented federal stimulus.
Randy Frederick, vice president of trading and derivatives at Charles Schwab in Austin, Texas, is looking for a one-day spike to a level no lower than likely in the mid-40s “where you’re already seeing a panic.”
“If I don’t panic… it could mean we haven’t hit rock bottom yet,” he said.
Hackett, of Nationwide, monitors options trading for a high ratio between shorts, which are usually bought to protect the downside, and calls.
“Most of these indicators, which is one of them, are really very poor historically,” Hackett said. But he said, “We haven’t seen that surrender where everything is flashing red.”
Meanwhile, analysts at BofA Global Research on Friday shared a “capitulation” checklist, which showed that while some indicators, such as investor cash, have reached critical territory, others haven’t reached levels reached during peak Previous sales.
“Fear and loathing suggests that stocks are vulnerable to an impending rally in a bear market but we don’t think 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 retail sales in the United States.
Whether or not there are clear signs of a bottom, stock sentiment may also be affected by market expectations about how aggressively the Fed will raise interest rates in the remainder of the year. The central bank has already raised rates by 75 basis points since March, and has indicated that a pair of 50 basis point increases may come at its next two meetings.
“I think you will have to at least wait two or three 50 basis point price increases before you start seeing any real signs of people coming back,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management.
Rather than looking for signs of a bottom, Willie Delwich, investment strategist at market research firm All Star Charts, focuses on indications that stocks can continue to rise.
Among the factors to watch is whether the net number of 52-week highs versus lows on the New York Stock Exchange and Nasdaq combined turns positive, from current negative levels. Another is the percentage of S&P 500 stocks that hit 20-day highs, which rose to at least 55% from less than 2% at the last count.
“A lot of people are now trying to pick a bottom and it’s proving to be futile and expensive,” Delwich said. “This is a risk-free environment…going to margin, and allowing volatility to show, makes a lot of sense for investors.”