Wall Street Week Ahead: Signs of market bottom elude investors after steep selloff

“Stock Exchange” is seen above an entrance to the New York Stock Exchange (NYSE) on Wall St. in New York City, US, March 29, 2021. REUTERS/Brendan McDermid

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NEW YORK, May 13 (Reuters) – Investors are studying a range of indicators for clues as to how much further a brutal drop in US stocks could go, with some signs that the drop in stocks may not be over yet.

The S&P 500 (.SPX) extended its decline to nearly 20% from its all-time high in January on Thursday, before rebounding at the end of the week, approaching the culmination of a bear market amid concerns that continued highs inflation will lead to more aggressive Federal Reserve interest rate hikes that could undermine the economy. The declines were even more pronounced in the tech-heavy Nasdaq Composite (.IXIC), which is down 24.5% since the start of the year.

Despite those losses, many widely watched indicators are yet to show the ubiquitous panic, heightened volatility and outright pessimism that have emerged in past market bottoms – a potentially worrisome signal for those looking to step in and buy cheap after the most recent sell-off in shares.

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Indeed, shares moved higher on Friday, with some pandemic-era favorites such as the ARK Innovation ETF (ARKK.P) showing double-digit percentage gains, albeit from low levels. read more

“I don’t think we’re out of the woods any time soon,” said Mark Hackett, head of investment research at Nationwide. “That said, investor expectations have been drastically revised.”

For example, the Cboe Volatility Index (.VIX), known as “Wall Street’s fear meter,” now hovers around 30 compared to a long-term median of nearly 18. However, past market bottoms have coincided with an average level of 37, and the VIX climbed. 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 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 to at least the mid-40s level as likely “where you actually see panic.”

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

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Hackett, of Nationwide, looks to options trading for a spike in the ratio of puts, which are typically bought for downside protection, and calls.

“Most of these indicators, one of which is put/call, are already very bad historically,” Hackett said. But, he said, “we haven’t seen that capitulation where everything flashes red.”

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

“Fear and disgust indicate stocks are prone to an impending bear market rally, but we don’t think 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 report on monthly US retail sales.

Whether there are clear signs of a bottom or not, stock sentiment could also be affected by market expectations about how aggressively the Fed will have to raise interest rates over the remainder of the year. The central bank has already raised interest rates by 75 basis points since March and has indicated that there may be a few 50 basis point hikes in the 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 seeing real signs of people coming back,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management.

Willie Delwiche, investment strategist at market research firm All Star Charts, isn’t looking for signs of a bottom, but is looking for clearer signs that stocks could build an ongoing rally.

One of the factors he’s keeping an eye on is whether the net number of 52-week highs versus lows on the New York Stock Exchange and Nasdaq combined will turn positive from current negative levels. Another example is the percentage of S&P 500 stocks making 20-day highs, rising to at least 55% from less than 2% at last count.

“Too many people are now trying to find a bottom and that is proving to be useless and expensive,” Delwiche said. “This is a risky environment… Standing on the sidelines, letting the 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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