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Insights: Market Thoughts; Searching For A Bottom

Searching For A Bottom

Coronavirus concerns are reverberating throughout markets, and despite the S&P 500 being ~25% off its highs and deeply oversold, there is no way to know for certain how serious things will get -- or how much further markets could sell off as a result. Considering the damage done to major indexes around the world, any potential bottom is likely to take months to develop. There will be major countertrend rallies along the way, but for now the important thing is that the trend is down, and we would treat rallies as selling opportunities. Below we highlight what we need to see before having confidence that equity markets are bottoming.

· Levels, Oversold Indicators. No one knows the level at which the market will find a bottom. Potential S&P 500 levels to watch include the 200-week MA at 2,640 (potentially breaking today barring an intraday rally), today's intraday low of 2,500 (very short-term level), the December 2018 low of 2346, and prior resistance in 2015-2016 at 2130-2200. We rely on the % of S&P 500 stocks above their 50-day and 200-day MAs as a way to measure oversold situations and to get a sense of where the market is on a scale of extremes. Even when an extreme is reached, the indicator often stays at the extreme for weeks and volatility remains high (i.e., we can stay oversold for weeks). As we have noted in recent reports, the buy signal only comes when the % of stocks above their 200-day MA advances strongly higher, above the 15-20% level. We also look for bullish divergences in these indicators when the S&P 500 retests the initial low, which often happens several weeks out from the initial low... see chart below and pages 2-3.

· 10-Day Moving Average. The S&P 500 has not closed above its 10-day MA since 2/20/20. This is a very short-term indicator that we need to close above in order to get a sign that panic selling pressure has abated. We do not want to be fooled by one of two day rallies until the S&P can get above this level. Down the road, the ability to get above the 20-day and 50-day MAs will give us additional confidence that the market may be putting-in a bottom. This same logic can be applied to the 10-year Treasury yield, as we need to see this begin to bottom in order to get stability in the equity markets.

· High Yield Spreads, Advance/Decline (A/D) Line. High yield spreads are surging/widening while A/D lines are falling. We need to see evidence of these reversing course in order to have confidence that equity markets are bottoming.