Has the market hit rock bottom? Look to capitulation signals – The Average Joe

    Has the market hit rock bottom? Look to capitulation signals

    Victor Lei — Head of Research

    May 17, 2022

    May 17, 2022

    Are you trying to determine whether we’ve hit rock bottom in the market? For a clue, pay attention to this word in the next few months: capitulation.

    Waiting for the market to capitulate

    Capitulation is seen as a narrative change on Wall Street and correlates with widespread selling. But capitulation is also when investors want to look for value again (Barron’s) — a sign of a bottom.

    From what we’ve seen, we likely haven’t hit capitulation yet — per the CEO of BRI Wealth Management (BBG). We’ve also only hit three of the ten “capitulation indicators” provided by Bank of America (MW).

    • In the last 19 bear markets, the average peak-to-bottom decline was 37%.
    • A 37% decline from 2021 market highs implies the S&P 500 will bottom at ~3,000.

    Another signal: Investors expect interest rate cuts at the bottom of a bear market. But so far, the only thing on investors’ minds is rising interest rates.

    Many analysts and strategists have called a short-term bottom but think markets could go lower. Recession expectations could be the trigger.

    Is the market pricing in a recession?

    With the S&P 500 trading near 4,000, recession odds are close to zero, according to DataTrek Research (MW). What level does the S&P 500 have to fall below to price in a recession?

    1/ 3,525 — is the level where DataTrek’s co-founder thinks the market will price in a 50/50 chance of a recession.

    2/ 3,850 — is the level we need to fall below per RBC’s Head of U.S. Equity Strategy (MW).

    And when we hit bottom, don’t expect the market to hit new highs right away — as we’ve been used to during COVID.

    • “Be prepared for a sideways market” — per Blanke Schein Wealth Management Chief Investment Officer (Forbes).
    • BofA Chief Investment Strategist thinks speculative tech stocks will remain in a bear market for the next two years.

    Investors: Early signs of a recession

    Per Neil Irwin of Axios, to see whether a recession is playing out, watch the companies beyond those impacted the most by the market sell-off and crypto crash:

    • Speculative tech companies only make up a small portion of the economy — trouble comes when layoffs and reduced investments spread to other sectors.
    • In the dot-com bubble aftermath, a wave of bankruptcies in the telecom sector (at least 27 in 2001) spread to other sectors, making borrowing more difficult.

    Today, many cash-strapped companies in today’s market could face a similar fate if the debt market turns south.

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