Wall Street Week Ahead: Signs of market bottoms elude investors after massive sell-off

‘Stock Exchange’ is seen above an entrance to the New York Stock Exchange (NYSE) on Wall St. in New York, U.S., March 29, 2021. REUTERS/Brendan McDermid

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NEW YORK, May 13 (Reuters) – Investors are watching a range of indicators for how far a sharp drop in U.S. stocks could go, with some signs suggesting the stock slide may not be over.

The S&P 500 (.SPX) extended its decline to nearly 20% from January’s record high on Thursday before a weekend rebound, approaching the peak of a bear market amid fears that high inflation persistent incites a more aggressive Federal Reserve interest rate increases that could harm the economy. The declines were even more pronounced in the Nasdaq Composite (.IXIC), which is down 24.5% year-to-date.

Despite these losses, many widely followed indicators are yet to show the pervasive panic, supercharged volatility and outright pessimism that have emerged during past market lows – a potentially worrying signal for those looking to step in and buy in. cheap after the most recent sell-off in stocks.

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Indeed, stocks rose on Friday, with some pandemic-era favorites such as the ARK Innovation ETF (ARKK.P) posting double-digit percentage gains, albeit from depressed levels. Read more

“I don’t think we’re out of the woods yet in the short term,” said Mark Hackett, head of investment research at Nationwide. “That being said, investor expectations have been dramatically reset.”

For example, the Cboe Volatility Index (.VIX), known as the “Wall Street Fear Gauge”, is now hovering around 30 against a long-term median of nearly 18. Past market lows have however coincided with an average level of 37 , and the VIX surged above 80 in March 2020 during a COVID-19 fueled market decline, after which the S&P 500 more than doubled from its lows thanks to an unprecedented stimulus from the Fed. Read more

Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas, is looking for a one-day spike at a level of at least the mid-40s as likely “where you actually see the panic.”

“If I don’t see panic…it could mean we’re not at the bottom yet,” he said.

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Nationwide’s Hackett is watching options trading for a spike in the ratio between puts, which are typically bought to protect against downsides, and calls.

“Most of these indicators, put/call being one of them, are already very bad historically,” Hackett said. However, he said, “we haven’t seen this capitulation where everything flashes red.”

Meanwhile, analysts at BofA Global Research shared their “capitulation” checklist on Friday, which showed that while some indicators, such as investor cash amounts, have reached critical territory, others have not. have not reached the levels reached during the peak of past sales.

“Fear and hate suggest equities are subject to an impending bear market rally, but we don’t believe ultimate lows have been reached,” they wrote.

Next week, investors will focus on earnings results from major retailers including Walmart Inc (WMT.N) and Home Depot Inc (HD.N), as well as a monthly U.S. retail sales report. .

Whether or not clear signs of a bottom appear, stock market sentiment could also be influenced by market expectations of how aggressively the Fed will have to raise interest rates in the rest of the year. The central bank has already raised rates by 75 basis points since March and signaled that a pair of 50 basis point increases could occur at its next two meetings. Read more

“I think you’re going to have to wait at least two or three 50 basis point rate hikes before you start to see any real signs of people coming back,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management.

Rather than looking for signs of bottoming, Willie Delwiche, investment strategist at market research firm All Star Charts, is focusing on clearer indications that stocks can mount a sustained rally.

Among the factors he monitors is whether the net number of 52-week highs versus lows on the New York Stock Exchange and Nasdaq combined turn positive, from current negative levels. Another is the percentage of S&P 500 stocks hitting 20-day highs hitting at least 55% from less than 2% at the last count.

“Too many people are trying to hit rock bottom right now and it’s proving futile and costly,” Delwiche said. “It’s a risky environment… Sitting on the sidelines, letting volatility play out, makes a lot of sense for investors.”

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Reporting by Lewis Krauskopf in New York Editing by Ira Iosebashvili and Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.

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