Last Friday I wrote a column on
A week ago today, I was waiting for signs of market capitulation at the 3800 to 3850 level on the S&P 500, as I wrote about last Friday. My trading instinct on Thursday detected complete capitulation after hitting a low of 3858 — fairly close to the target range.
What made Thursday’s market move a capitulation that sets up an upside reversal? We had a rare streak of six straight down weeks and six straight down days in the S&P. The morning gap became a final wave and was retested in an afternoon move as the market felt desperate as each rally continued to be sold. The generals were shot: Apple (AAPL) and Microsoft (MSFT) were under pressure all day, well below recent trading ranges. However, former high flyers caught a short cover bid, signaling washed out levels after epic downdrafts.
In an intraday note on Thursday, Morgan Stanley market strategist Mike Wilson shifted to tactical buying on tech stocks due to falling interest rates. Wilson has been properly bearish this year, with a target close to Thursday’s low. Lower commodity prices and lower interest rates could help boost optimism about peak inflation.
Market sentiment rarely becomes this bearish – generally seen as a contrarian indicator. Additionally, 92% of Nasdaq-100 stocks are trading below their 50-day moving average, an indication of extreme oversold readings and also near levels where past markets bottomed. In such market conditions, most investors look to deploy cash to gain strength, only after they believe that a bottom has been reached. The further the market moves away from the bottom, the more compelling the prospect that short-term lows have been established.
During the Nasdaq’s technology-led bear market in 2000, many opportunities presented themselves to capitalize on moments of extreme stock sinking with buyable funds. I reminded my Twitter followers (@polar_cap) of this on Wednesday night in anticipation of Thursday’s sellout trough.
Could I be wrong about the surrender stocking? Indeed, if the market quickly breaks through Thursday’s low, it’s fair to assume that this bottoming process will take more work.
The market has been selling on any strength most of the year. I think a strong trade rally is ahead where it will be more of a bearish buying market in the weeks to come. A reasonable target is for the S&P to move towards the 4100-4200 range, former market support.
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