By Yasin Ebrahim

Investing.com — Wall Street’s post-Federal Reserve rallies were short-lived. A day later, the sellers came back to do a job of demolition. The stock market suffered its worst single-day losses since the pandemic, and their losing streak grew to six weeks.

This is a decrease of 14% over the past year, and a 10% decline in recent years.

When big selloffs make an appearance on Wall Street, debate about whether the market has bottomed isn’t far behind. But the market still hasn’t reached the “puking out” moment that usually precedes a market bottom and signals it’s safe for the bulls to come out of hiding.

“For downside capitulation, you need to have this ‘puking out’ in the market … that moment when the time comes to buy, but you won’t want to,” Chief Market Strategist David Keller at StockCharts.com told Investing.com in an interview on earlier this week.

The ‘puking out moment’, which is a sign of investor capitulation has not yet occurred. There’s still too much optimism in the market and too many speculative bets. Additionally, there’s the possibility that the Fed might not be ready to take on inflation control even if it means that there’s another recession.

“Investors are still too excited about finding a bottom and riding the next leg higher, you need that to completely evaporate … you need people to think the last thing you’d ever want to do is buy stocks” Keller added. “That usually ends up being when the market bottom plays out.”

Identifying a market bottom isn’t an easy endeavor. However, history has shown that price action, market breathing, and investor sentiment are key indicators to be on the lookout for.

Price action, the movement of a stock’s price over time, has recently shown that optimism is fading as moves higher, or volume, in stocks on up days are lower than that on down days, suggesting that investor conviction to ‘buy the dip’ is fading.

The latest AAII Sentiment Survey published Thursday shows that investor sentiment towards stocks has recovered from a record low of last week but is still below the historic average.

“Bullish sentiment, expectations that stock prices will rise over the next months, jumped by 10.4% to 26.9% last week,” AAII Sentiment Survey showed. But the big move wasn’t enough to prevent optimism from remaining below its historical average of 38% for the 24th consecutive week.

Although sentiment and price action indicate that stocks may be heading for a near-term bottom in the short term, market breadth (the movement of the individual stocks comprising the index) continues to show more signs of speed.

A bearish market context can lead to market breadth being negative. Stocks are more likely to decline than advance. This negative scenario is exacerbated when markets are in the bottoming out phase, as a ‘sell everything’ mentally usually proceeds. But there are still corners of the market holding up well, suggesting sellers aren’t ready to surrender.  

“The challenge right now is you really haven’t seen a complete bombed out market breath scenario, where everything has gone down, there’s still things that are actually holding up pretty well like energy stocks,” Keller said. 

“This also looks a lot like earlier in a cyclical bear market where the negative breath that all of a sudden acknowledges that people are in the acceptance phase and recognizing that the markets really are deteriorating,” Keller added. “In 2008 and 2009, markets went down for another six to nine months before the eventual bottom and stocks.”

Market bottom-out will be influenced by investor confidence in Fed’s ability curb inflation without causing a recession. 

“The belief that the Fed is capable of managing inflation and raising rates steadily without having any negative effects has been shaken,” Keller said. Keller stated that a low confidence level in the Fed’s ability to handle this situation is not conducive to a bullish market.

Wall Street has its own opinion, however they do agree that stock market risk and reward are attractive since some of the recession risks have been baked into stock price.  

“I believe it’s [market bottom] entirely dependent on whether the economy goes into recession or not, Chief Strategist at Spouting Rock Asset Management Rhys Williams told Investing.com in an interview on Thursday. 

The risk-reward ratio is appealing because it seems that there is a greater consensus around the fact that a hard landing or recession cannot be avoided. It can be avoided. But, if not, you will lose some of the upside. [recession risk]Williams said that the price is included.