Stocks bounce from the depths of Thursday’s descent, but will it stick?
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The daily journal of Mike Santoli is CNBC’s Senior Markets Commentator. It contains ideas, stock analysis, and trends. The anticipated bounce finally emerges from the depths of a steep decline. Oversold tape caused traders to become desperate enough to sell to make both bullish and bearish recents stop trying to buy. As noted yesterday , the CNN Fear & Greed Index was nearly pinned at minimal levels, the active tactical traders of the National Association of Active Investment Managers survey was at near two-year lows in equity exposures. There were many technical signs of selling exhaustion. The S & P 500 flirted with a 20% decline before the mechanical limit orders stepped in: the machines mindful of a long history of sharp declines halting, or at least pausing, just shy of a down-20% close. So what now? Even those who believe the confirmed downtrend is in place and will remain so allow for the idea that the S & P 500 can rally another 5%-7% from here before running into some heavy friction. Remember that would merely take the S & P to the upper part of the 4,100-4,300 band that served as support for some three months before the latest spill. It will be interesting to see if the NYSE closes today with a 90%+ upside volume. This is often seen as a sign that there has been buying momentum, which could support the rebound scenario. Historical forward returns following a stock drop of 15%+ and sentiment washout are favorable over the course of a year. However, there have been a few major downside events (2000 and 2008. This makes the recession/no-recession call fairly consequential in terms of handicapping further potential downside risk. It’s hard to see how earnings forecasts for the second half of the year don’t start to leak lower, but arguably the six P/E-point compression in S & P 500 valuation has somewhat taken account of that. Is the market going to continue its usual overshoot? Or will it halt at the “neutral” level of valuation due to historically high valuations and concentrated premium growth stock leaders that was 16x. This is a real question that’s not just rhetorical. It spent very little time in that area after the forward earnings fell to around 14x at the close of 2018 and 2015-16 corrections. The scares and extent of the damage to stocks that fell to new lows were more extensive than anything we have seen this year. Are there any signs that value is being discovered in areas of the market that include brand-name firms with “quality” attributes and steady performance? This could be true. This is evident when you look at a specific quality growth basket. These consumer, media, and financial stocks have been pushed to significant discounts from their 10 year-long average valuations. While you can certainly fall into value traps in this manner, long-term investors will likely have much more to choose from. The comments of Federal Reserve Chair Jerome Powell about policy and the possibility that we don’t get a soft landing etc. have led to market lift. This suggests things had been priced with these issues in mind. The Treasury yields are up, but they remain well below their recent highs. This is more of a recent relaxation in risk flight than an aggressive revision of Fed expectations. Two, or better yet three, half-percent rate hikes by the Fed are planned for this summer. While we can argue whether inflation will decline or something could break before the Fed does, that is the assumed timeline the markets have been working within. The market breadth seems to be on the right track for one those 90% volume sessions on NYSE and Nasdaq. It will be interesting to hear what “breadth thrusts” are and how reliable. Stocks that have been most destroyed are the ones with the greatest gains, as is to be expected. VIX finally sinking below 30, perhaps vindicated for not shooting to 40 on the latest S & P 500 slide. The system is expected to experience bumpiness, but there shouldn’t be any acute stress. Four in every 10 trading days this year have seen at least a 2% intraday S & P 500 range, so this will have to settle down before VIX can start slipping toward more long-term normal levels closer to 20.
Traders at the NYSE floor, May 13, 2022.
Brendan McDermid | Reuters
This is Mike Santoli’s daily notebook, CNBC senior markets commentator. It contains ideas and information about stock market trends as well as statistics.
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