Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Stocks Have Not Capitulated Yet

Published 09/30/2022, 03:54 AM
Updated 09/20/2023, 06:34 AM
  • Stocks haven’t shown the typical type of fear associated with a bottom
  • Valuations are still high
  • The S&P 500 may need to fall below 3,200

The S&P 500 is down more than 20% on the year and has yet to show any of the critical signs of a market bottom, suggesting there may be further to fall. Those essential capitulation readings that often accompany bottoms haven't developed, and some of them suggest things may still get worse before they get better.

Adding to this, valuation for the index remains elevated, and earnings estimates have only started to turn lower and may fall further as earnings season nears. Additionally, high yield spreads are widening, and volatility measures show that investors' mood is complacent. When these levels spike, that is when a bottom is likely to be near.

Valuations are Still Too High

The overriding factor sending stocks lower is higher rates, and while there are early signs that year-over-year (yoy) headline inflation rates may have peaked, they aren't coming down sharply either; they have been hovering in the 7% to 9% range for several months. It makes finding a bottom in this market much more challenging because we do not know the pace at which inflation will fall or how high the Fed may need to raise rates.

One thing that does help to define a bottom is when investors can say stocks are too cheap to ignore. Except for the 2009-10 financial crisis recovery, we have seen the S&P 500 bottom around 12 to 13 times one-year forward earnings estimates. Currently, the index is trading around 15.3 times 2023 earnings estimates of $242.43, placing the index in a range of 2,910 to 3,150. That low P/E multiple could be enough to account for any further decline we see in earnings estimates in the coming month and to start to attract value investors.

S&P 500 P/E

No Signs of Worry

Additionally, at this point, the corporate BBB spread over the 10-year Treasury rate is still rising while also not reaching prior peaks seen at market bottoms. The major market bottoms in 2003, 2009, 2011, 2016, and 2020 saw this spread rise above 2.3%. The only time the spread did not rise above 2.3% was in 2018. Given the rising rate environment, the spread between junk bonds and Treasuries seems unlikely to fail to reach that 2.3% threshold.

Corporate Bonds/Treasuries Spread Vs. S&P 500

At this point, we have failed to see the VIX index make a substantial move higher. Historically, it is when the VIX closes above 36 following a very sharp move lower that we tend to start a bottoming process; at this time, the S&P 500 continues to make lower lows, while the VIX has made a series of lower highs.

VIX Vs. S&P 500

While the market can bottom and bounce anytime, history suggests that this current bear market cycle has yet to play out entirely. It isn't clear at this point whether inflation has peaked or when this Fed rate hiking cycle may end, and until some of these critical points can be answered, it seems unlikely for a bottom to have been reached.

Disclaimer: Charts used with the permission of Bloomberg Finance LP. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer's views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer's analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer's statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

Latest comments

Let's wait for the forward statements. F/PE may look much different. We'll probably be plugging in a new set of #'s.
Last two article you said could be bounced back but keep dropping now finally say more to drop then could be another sign for bounce
So many arm chair quarterbacks downing the author. Maybe some of them should become columnists.
Can anyone explain to me why VIX operates as a fear gauge where in fact it is meant to measure volatility. So why does it only spike on downward volatility? Why does it collapse with big percentage upward price moves? Theoretically, it’s supposed to measure increase premium in options, both puts AND calls! If the market rises, premiums on calls soar. So why is it called a volatility index. Volatility goes both ways. Today it’s a euphemism (“I expect volatility”) for expectation of a falling market. I don’t get it.
This is a common question that I have yet to read a convincing explanation for
Uncertainty equals bigger swings in the market. There is more fear because the market doesnt like that and things go down as people wait for a bottom. So up down real big as people try to time it as a aposed to a relatively slower steady less volitile climb. Uncertainty = Fear = Volatility
Uncertainty equals bigger swings in the market. There is more fear because the market doesnt like that and things go down as people wait for a bottom. So up down real big as people try to time it as a aposed to a relatively slower steady less volitile climb. Uncertainty = Fear = Volatility
There they go using that word again
if kramer could time bottoms he would be on the beach with beautiful models. "Stocks MAY have not Capitulated Yet" That is how a seasoned analysts writes, you have still much to learn.
Go back to WSB where you belong. You literally add nothing of substance here except spamming the same thing over and over.
apes stronger together.
lol kramer, you are in for a big surprise yet again, it seems you have not been humbled by 2 + years of being dead wrong. a couple of bear months and you think you know it all haha. "have not capitulated yey" ... lmao. today marks the day of a big bounce and a whole green month. blind kramer followers you have been warned. will come back later like every afternoon to say i told you so.
How stupid do you feel.....again.....daily, weekly, monthly you blabber the same thing everyday. The market would need to go up 10% just to get you back to 0....give it a rest, look in the mirror, and quit. You obviously should not be stock trader.
How do you know when the perfect time is to purchase stocks of a company which has dropped drastically due to the rising interest rates Etc?
Well, NO ONE knows the best time to invest. If we did we would all only invest then and all be millionaires and no one would ever make a loss. But IMHO, all headwinds are pointing only in one direction with very very few positives on the horizon. I am still invested monthly in a 100% equity pension fund (mainly due to salary tax savings - would rather my money go to pension versus taxes). But in terms of active investing, I am not going near the market until it retrenches to pre covid levels - so Nasdaq at around 8,000, S&P under 3,000 and Dow around 25,000. Then will start dipping in and keep buying select long-term shares the longer it stays under these levels (mainly large mega tech caps - Google, Microsoft, Amazon, Apple, Meta, Tesla, Block, Nvidia, AMD, Uber etc). The way the market is going - unless shock bounces - I think will get to these levels by the Q2 2023 earnings period.
Peter....you think SP will get to 3000?, I would be surprised that low, hopefully not.
 Depends if there is a recession or not in 2023. The market has fallen to accept ongoing QT & interest rate hikes. But still not factoring in a prolonged recession as inevitable yet in 2023 (however if forward-looking earnings this or next quarter highlight far weaker growth...). BoA, Barclays and Morgan etc all have S&P falling to around 3,000 if a 'hard landing/recession' does kick off in 2023. Indeed, historic trends show that a prolonged recession for more than 1-2 quarters = the S&P falling by 50% versus all-time highs (Dec 2021) during the proceeding 12-18 months. So down to circa 2,400. I think the money supply is still too high to see the market fall this low..unless a major unforeseen incident occurs e.g. Russia nukes Ukraine, China attacks Taiwan, US technically defaults after republicans block lifting the debt ceiling...or a cascading 'Lehman Brothers' incident (e.g. the UK pension sector was supposedly VERY close to collapse before BoE stepped in to save only last week)
Yes, of course. The smart money knows that stocks will bottom in 2023. 5 things are guaranteed. Death, taxes, the stock market bottoming in 2023, the collapse of the Euro and the war in Europe really being kicked into high gear in 2023.
I think agree with most apart from the war in Europe. I think we could actually hit a tug-of-war pause period with Russia just threatening nuclear attacks unless Nato stops providing Ukraine with weapons. Think this might be kept in check however by the Russian public, India and China who regardless of everything will pressure Putin not to use WMDs. Russia is trying to act all hard and bringing up 300,000 conscripts BUT they have already used up huge amounts of their tanks/fight jets/missiles and other hardware + their most experienced soldiers which will take years to replace - so trying to act hard so Ukraine gets scared and pauses for peace (a toothless bear if you will)
The author lists a multitude of factors falls short of naming any one of them with certainty as the catalyst to identify the bottom of the market. I suppose that is one way to describe the situation if you are afraid of being wrong. I would argue that the market bottom will be reached when whatever caused the initial downtrend has been reversed. This downtrend started in January of 2022 and not from high pe ratios / low earnings yields which still remain higher than the 10 year note interest rate. No the main catalyst for this downtrend is inflation and the main component of it is energy prices. Our insider trading thinktanks at the Federal reserve haven't figured out yet that interest rate hikes curtail consumer discretionary spending but have little impact on energy prices which is a necessity. Apparently people are supposed to walk to work and the grocery store now. No Russia is bringing down the global economy with oil and natural gas economic warfare
When everyone is bearish, go the opposite way.
How do you know "when" the time is right to invest in a corp/com after it's lost so much value due to inflation? I'd love to simply drop $1000.00 into a company knowing this investment will grow substantially.
No one knows, John. No one.
Eveeyone is guessing 3200 or 3300 is capitulation. I say we just had capitulation at 3600, and will trap all the bears. Wait and see who's right.
Everyone???? Really as most of the major Bank projections since Fed announcements this month are now projecting a 2900 - 3100 bottom if a recession emerges in 2023. The majority of economists and think tanks including the IMF and World Bank are now saying there will be a recession (or at the least very limited global growth until 2024). Could be even lower if a prolonged recession emerges / any action by Russia or China makes things worse. We now have QT, inflation which will only get worse over winter, massive debt hangovers, labour shortages meaning 0 hiring scope or growth left, global taxation, international tensions, supply blockages and numerous countries entering recessions - YET you still think the market will rise due to emmm blind faith?????? (I think Bulls got too used to QE and huge debt being thrown around to keep the market rising since 2009 - get used to 12-18 months of the opposite until the market cools down). I personally won't dip back in until the S&P is under 3,000
Very good analysis as usual ..
Where are the rules saying exactly how much the market has to "capitulate" before markets are allowed to recover?
Duh, no one said there are "rules", but only historical indicators. Markets are never the same but tend to fulfill those markers. Will the market bottom with MANY of them lacking? I personally don't think so, we have even more problems than 2008 and 2001 for one.
we will be hearing this headlines from the bottom to around 1/2 of the recovery
yup
If you watch MOM CPI data, November 10 should be the date when YOY CPI will come down sharply. If you look at last 2 months, CPI increase with 0.1 percent- very low value, below the 2% YOY target. If October 13 report is in line with last 2 months report, it should forced FED to stop hiking, unless FED have a hidden agenda ( for example strong dollar lead to weakness for most of other countries economies, that will reduce imports from China, who is supporting Russia - a war driven agenda)
Forecasts are pointing to an increase in MoM inflation, so even if falls it will be very small. Biden cannot cannibalize the strategic reserves for too long (still a long time to go but those are strategic so they will need to slow down the dump)
New low of the year - yes, agreed, but there will be no capitulation in the form many speculators/analysts expect from the market, but a slow melt down. Especially with Nasdaq and its 6 megacaps that control the index performance.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.