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Market Bottom: Are We There Yet?

Stock Markets May 07, 2022 12:14PM ET
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© Reuters.

By Yasin Ebrahim

Investing.com -- The post-Federal Reserve rally mid-week on Wall Street was short lived. The sellers returned a day later to carry out a demolition job. Stocks suffered the biggest one-day loss since the pandemic and extended their losing streak to six weeks.

The S&P 500 is down 14% year to date, the Dow Jones Industrial Average is 10%, Nasdaq 100 Futures slumped 23%.

When big selloffs make an appearance on Wall Street, debate about whether the market has bottomed isn’t far behind. But the market still hasn’t reached the “puking out” moment that usually precedes a market bottom and signals it’s safe for the bulls to come out of hiding.

“For downside capitulation, you need to have this ‘puking out’ in the market … that moment when the time comes to buy, but you won't want to,” Chief Market Strategist David Keller at StockCharts.com told Investing.com in an interview on earlier this week.

This 'puking out' moment, a precursor for investor capitulation, has yet to play out as there is still too much optimism and speculative bets sloshing around in the market as well as a lingering doubt that the Fed may not be prepared to do whatever it takes including causing a recession to rein in inflation. 

“Investors are still too excited about finding a bottom and riding the next leg higher, you need that to completely evaporate … you need people to think the last thing you'd ever want to do is buy stocks” Keller added. “That usually ends up being when the market bottom plays out.”

Identifying a market bottom isn’t an easy endeavor. 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 is fading as moves higher, or volume, in stocks on up days are lower than that on down days, suggesting that investor conviction to ‘buy the dip’ is fading.

Investor sentiment on stocks, meanwhile, has rebounded after hitting an all-time low last week, but remains below the historical average, according to the latest AAII Sentiment Survey, published on Thursday.

“Bullish sentiment, expectations that stock prices will rise over the next months, jumped by 10.4% to 26.9% last week,” AAII Sentiment Survey showed. But the big move wasn’t enough to prevent optimism from remaining below its historical average of 38% for the 24th consecutive week.

While price action and sentiment show that stocks are on the road to reaching a short-term bottom, market breadth, the movement of individual stocks that make up the index, continues to flag more speed bumps ahead.

In a bearish market backdrop, the market breadth tends to be negative, with more stocks declining than advancing. This negative scenario is exacerbated when markets are in the bottoming out phase, as a ‘sell everything’ mentally usually proceeds. But there are still corners of the market holding up well, suggesting sellers aren’t ready to surrender.  

“The challenge right now is you really haven't seen a complete bombed out market breadth scenario, where everything has gone down, there's still things that are actually holding up pretty well like energy stocks,” Keller said. 

“This also looks a lot like earlier in a cyclical bear market where the negative breadth that all of a sudden acknowledges that people are in the acceptance phase and recognizing that the markets really are deteriorating,” Keller added. “In 2008 and 2009, markets went down for another six to nine months before the eventual bottom and stocks."

Investor confidence in the Fed's ability to curb inflation without tipping the economy into a recession will also play a role in market bottom out process.  

"The idea that the Fed can manage inflation and raise rates in a consistent way without having a negative impact has started to shake. When the confidence in the Feds ability to manage through this is low, that is not a bull market environment," Keller said.

Others on Wall Street agree, though also point out that the risk to reward opportunity in stocks are beginning to look attractive as some of the recession risk is being baked into stock prices.  

"I think it's [market bottom] entirely dependent on whether the economy goes into recession or not, Chief Strategist at Spouting Rock Asset Management Rhys Williams told Investing.com in an interview on Thursday. 

"The risk to reward is attractive because there seems to be increased consensus that some sort of hard landing, or recession is impossible to avoid. If it is avoided, there'll be a lot of upside, but if it isn't avoided, some of this [recession risk] is priced in," Williams added. 

Market Bottom: Are We There Yet?
 

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Comments (44)
The Investor
BullishMarket May 09, 2022 5:34PM ET
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Are you happy Powell?
Jonathan Denno
Jonathan Denno May 09, 2022 1:30PM ET
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I would love to get my hands on the crystal ***people in this comment section apparently all have.
Jonathan Denno
Jonathan Denno May 09, 2022 1:30PM ET
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I would love to get my hands on the crystal ****people in this comment section apparently all have.
Adi Avivi
Adi Avivi May 09, 2022 5:53AM ET
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words words.. only decreasing cpi will mark bottom
Jeff Gordon
Jeff Gordon May 08, 2022 11:02PM ET
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Bottom? Write this article at DOW 12,000 and you might bottom, the coming crash will be for the history books. A depression is coming folks.
Scott Hobbs
Scott Hobbs May 08, 2022 11:02PM ET
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You are better at driving a car
DH HM
DH HM May 08, 2022 10:49PM ET
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Well, if we look eliott wave, we might near the bottom of A...then it will go back up then down more at C...so not the bottom yet.
DH HM
DH HM May 08, 2022 10:49PM ET
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And there's a lot of differences between 2008 and 2022.
Stephen Fa
Stephen Fa May 08, 2022 6:46PM ET
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Up soon before down more
Jamie Kent
Jamie Kent May 08, 2022 5:50PM ET
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We're not anywhere near the bottom, we are headed for a major recession. It's not going down, it's going way way down; think Mariana's trench
Mustaq Ahamed
Mustaq Ahamed May 08, 2022 2:20PM ET
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Market is still in a exuberance, bottom will not happen like 2020 March eventually will reach there in a phased manner
Cody Hawkins
Cody Hawkins May 08, 2022 10:33AM ET
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This party won't go on forever, seeing a mix of 1929 and 1937. The greed in the market is palpable. Everyone will be blind sided and those who trade on a daily basis will get cleaned out.
 
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