After a week of rebound across the board, has overseas markets stabilized? Keep an eye on these metrics

With the three major U.S. stock indexes “all higher” last week, investors are assessing whether the worst of this year’s collapse is over.

Last week, the Dow rose 6.24%, ending the eight-week losing streak, the longest losing streak since 1923, and the S&P 500, which had the longest losing streak since 2001, gained 6.58%, and both the Dow and the Dow hit 2020. The biggest weekly gain since November, the Nasdaq rose 6.84%, and the S&P ended a seven-week losing streak. The Russell 2000, which had fallen for five weeks, rose 6.46%.

what happened?

The S&P 500 is still down 13% so far this year, its biggest drop for the same period since 1970, largely as the Federal Reserve embarks on its most aggressive tightening of monetary policy since 2000 to tame inflation and investors are increasingly concerned that higher interest rates could lead to economic losses. decline.

Rising interest rates have dented the appeal of tech and growth stocks, with the Nasdaq 100 still plunging 22% this year, its biggest drop on record for the same period.

But less hawkish rhetoric from Fed officials last week, combined with resilient U.S. consumption and upbeat corporate earnings, offered investors a glimmer of hope.

Inflation-adjusted real interest rates have fallen over the past week, as has corporate credit spreads (the yield premium investors demand to buy corporate bonds relative to U.S. Treasuries), and traders have slashed expectations for future Fed rate hikes. expected.

Some retailers reported strong earnings reports. Macy’s, Nordstrom, two discount retailers Dollar Tree and Dollar General posted better-than-expected first-quarter results and raised their guidance, driving the retailer sector up sharply.

In addition, given that U.S. stocks have already suffered a wave of selling, some investors have recently begun to buy into dips.

So, are U.S. stocks about to bottom out?

There could be more ‘false shots’ before the market bottoms

Analysts generally agree that there could be more “fake shots” ahead of the stock market’s eventual low. Neither Mahmood Noorani, CEO of Quant Insight, a provider of quantitative financial market analysis, nor Kevin Deempter, an analyst at Renaissance Macro Research, a market research firm, believe that U.S. stocks have bottomed.

Noorani said a further pullback in real yields could send stocks higher in the near term, but he believes it is unlikely that yields have peaked.

He believes that while data, including the Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) price index, released last Friday, showed U.S. inflation was slowing, the job of bringing price pressures back under control was far from done. .

That leaves uncertainty about how high the federal funds rate (currently 0.75%-1%) will end up. Investors will be disturbed if there is a slight wiggle above current market expectations (2.5%-2.75%).

While the S&P 500 isn’t technically in a bear market yet, many market watchers see it as a formality, and they’ve observed bear market behavior in equities for most of the sell-off in 2022.

Deempter, in his report on Friday, played down optimistic signals that consumer discretionary stocks outperformed the rest of the market by a wide margin on Thursday. He believes that while the relative performance of consumer discretionary does historically improve substantially a month or so before growth bottoms out, the move is likely to be an oversold rally rather than a bottom.

“History shows that both growth and inflation need to weaken further before the market bottoms out,” he said, noting that the energy sector has consistently outperformed the healthcare sector, suggesting inflation has not peaked.

Beyond that, there is still no shortage of outright bearish views.

Earlier, Zhang Yidong of Industrial Securities published a report that the current “mid-term end” of US stocks may have appeared, and the major indexes are close to or surpass the bear market boundary, and then it is expected to usher in a “breathing” window period that lasts for several months. But this does not mean that U.S. stocks will usher in a reversal, and may continue the trend of falling and falling. He said: “This round of U.S. stock market recession and bear market may be doomed.”

Michael Burry, founder of asset management firm Scion Asset Management, hinted in a since-deleted tweet that the current market is not without resemblance to the 2008 market crash. Michael Burry is best known for his successful prediction of the 2008 U.S. housing market crash in Michael Lewis’ book “The Big Short.”

In a recent tweet on Friday, he reflected on the prospect of a recession led by the U.S. consumer, saying:

“U.S. personal savings has fallen to 2013 levels, the savings rate has fallen to 2008 levels, and credit card debt has grown at a record pace, back to its pre-pandemic peak. What’s looming: a consumer recession and more income issues. ”

When will the market stabilize? Keep an eye on these metrics

As U.S. stock markets have recovered over the past week, investors are tracking indicators ranging from options bets to surveys of investor sentiment to gauge when the volatility may end.

Four of the five leading indicators she tracks are still below extreme levels, suggesting there is more room to fall, Lindsey Bell, chief market and currency strategist at financial firm Ally Financial, said in a recent report. These metrics include:

Market volatility is lower than it was during previous sell-offs

The Cboe Volatility Index (VIX), known as Wall Street’s “fear index,” measures the price of options on the S&P 500, including those that investors tend to use to protect their portfolios. While the index has risen sharply this year, it remains well below levels reached in previous bear markets. Nancy Tengler, chief executive and chief investment officer at investment firm Laffer Tengler Investments, said the VIX has yet to see the level of upside it normally would during a sharp decline.

Anxiety among options traders at moderate level

Another fear gauge in the options market has climbed, but not yet to extreme levels. The ratio of put options to call options recently hit 1.33, still well below the highs of 1.7 and 1.8 reached in late 2018 and early 2020, respectively, according to FactSet, a provider of global financial analysis apps.

Put options give the contract holder the right to sell the stock at a specific price in the future and can be used to profit from falling markets. A call option gives the contract holder the right to buy stock at a specific price in the future.

The ratio can help determine when investors are starting to feel hopeless, which could signal the end of a selloff, said Mark Hackett, head of investment research at Nationwide Investment Management Group. When the ratio reaches an extreme, it means “yes, today is the day everyone decides to sell,” he said.

Many stocks are still trading above their 200-day moving averages

Traders track a 200-day moving average indicator of stock performance as a means of judging how recent price swings compare to longer-term trends. The fewer stocks are trading above that moving average, the more pessimistic investors are. According to Ally, about 30% of stocks are now trading above that moving average, higher than in previous periods of market stress, implying more downside.

Bond spreads remain relatively tight

Some on Wall Street track corporate credit spreads, the spreads investors demand from holding ultra-safe U.S. Treasuries in favor of corporate bonds, which rise when they fear a recession and default.

Spreads have generally widened recently, but remain well below recent highs set in 2020. “The spread is widening, but it’s nowhere near the level of panic that we’ve had with previous massive sell-offs,” said Dan Morgan, senior fund manager at investment bank Synovus Trust Co.

Investor Outlook: Gloomy

Wall Street often tracks retail investor sentiment, arguing that it’s a good time to buy when they’re at their most pessimistic, and their mood has been so low of late.

Many use the American Association of Individual Investors’ weekly survey, which asks investors to forecast where the market will go for the next six months. According to Ally, if the bears outnumber the bulls by 30 percentage points, it is a sign that the worst of the decline is over.

For now, lower valuations have begun to lure buyers back into the market.

Historically, during the first five worst starts for the S&P 500, the index moved higher for the rest of the year and averaged over the ensuing seven months, according to broker-dealer LPL Financial. rose 19.1%. One caveat though: Stock market trading and investing have changed dramatically since the 1970s, let alone the 1930s.

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