So, big declines in the market the past few days. However, when there's this
much fear? I like to put my finger on the trigger (or in this case...on the buy
button, but that doesn't sound as cool). I've been comparing the current decline with the previous sell-offs
in terms of technical levels and breadth indicators and it seems to me that
a bottom is very much a possibility. Let's take a look.
There are a couple of important indicators I like to occasionally consult
when both fear and euphoria are prevalent in the markets. First the 3-month and 52-week highs minus lows in the NYSE. These are, unfortunately, a relatively new
indicator so there's only data going back to 2017. Regardless, its
usefulness is clear if you go and play around with the indicators. You have
multiple time periods available such as the 5-day and 6-month as well.
Extreme readings such as the one we're currently seeing usually signal market
bottoms. Next up are the famous '% of stocks above 50- and 200 daily moving
average' indicators. Those basically show us the participation rate of
stocks in declines and uptrends. In this case they both show extreme
readings, which coincide with market bottoms. And lastly, the inverted VIX, which is an obvious one. Take a look at the weekly scale chart below (click to enlarge).
So, indicators are all flashing extreme readings, plus the potential for
resistance (the 2022 top) turning into support all add up to the valid case
that the market bottom is in. Now, it obviously can feel like a bit of
gamble to base your decision on technical breadth indicators especially when
the market is being driven by headlines. But, if we take into account past
occurrences (see also the late 2018 sell-off which is very similar in terms
of environment: Trump as president, tariffs, recession fears, and high
interest rates) then we can make an educated guess that we could see a move
heading, at the very least in my opinion, towards the 200 day MA. In a nutshell, from a risk/reward perspective this could be a valid spot to take a stab at a possible bottom.
I am aware of the nature of this, though. They do say to time a bottom is like trying to catch falling knives and I agree. However, you don't have to buy the S&P leveraged. If you've been eyeing up a stock for some time that has held up alright in this sell-off? Then a small buy into it isn't such a bad idea. Or you can actually just buy the leveraged S&P too if you're feeling bold and it's within your risk framework.
Elsewhere, we can look at sentiment through the AAII survey too. This is showing us an extreme reading of bearishness amongst investors, which is just
exactly what you'd want to see in a market decline filled with fear. Especially, if you're contemplating on putting your
money back on the line. Take a look at the graph below, it's just plainly showing extreme fear beyond logic. Over 60 percent of respondents are bearish on the market...the highest level since the 2008 GFC bottom!!!! Talk about exaggerating.
So, what do you think? Is it a lost cause to look at this from a technical
perspective or is there some value to it?
Let us know!