Stock market liquidation in the “liquidation” phase. Why it has to get “hotter” before it shuts down.
This week’s sharp U.S. stock market U.S. stock market reversal may have rattled investors, but a sell-off that may finally be underway will likely need to “heat up” before it burns out, a top watcher warned Friday. Wall Street.
One remarkable thing about the market’s wild two-day swing on Wednesday and Thursday is that the internals of the market — indicators measuring things related to the number of rising stocks in an index versus falling stocks — were also distorted, even if they tend to be “less fickle”. than prices, said Jeff deGraaf, founder of Renaissance Macro Research, in a Friday note.
The Dow Jones Industrial Average DJIA,
plunged more than 1,000 points or 3.1% on Thursday after rising more than 900 points on Wednesday, while the Nasdaq Composite COMP,
fell 5%, the worst one-day performance for both indices since 2020. The S&P 500 SPX,
fell 3.6% on Thursday. Shares ended lower on Friday.
This week saw strong internals as stocks surged following Wednesday’s Fed meeting, while Thursday’s selloff came with one of the worst internals, with just 5% in the Russell 3000 RUA,
shares are rising amid 8% in volume, he noted. (see table below).
DeGraaf noted that back-to-back swings in internals on the scale seen this week are rare, with the latest occurring near stocks’ March 2020 COVID lows. Indeed, investors had never seen internal swings as severe as Thursday. before the financial crisis of 2008-09 (see chart below).
Renaissance macro research
But before talk of the COVID low gets potential bulls too excited, the analyst warned that the market may have some way to go before it burns out. Meanwhile, the S&P 500’s fall below Wednesday’s low turned a call for a stock market rebound into a toast.
“We’re entering a sell-off environment, and while these often run out, they get hotter before they do,” deGraaf said.
Market watchers who doubt stocks have bottomed yet also noted the lack of a convincing rise in the Cboe VIX volatility index,
or VIX, an options-based measure of expected 30-day volatility in the S&P 500. Market lows often correspond to the VIX, an indicator of traders’ nervousness, spikes, but the rise in the index this week was relatively moderate.
The VIX topped 35 in early action on Friday, above its long-term average below 20, but failed to clear last week’s high above 36, let alone March high above 37.
“This suggests that investors think an even deeper selloff could occur over the next few months, with the Fed expected to raise interest rates another 50 basis points at the June meeting,” Robert said. Schein, chief investment officer at Blanke Schein Wealth Management, based in Palm Desert, Calif., with approximately $500 million in assets under management.
“If investors truly believed the bottom was near, we would likely see an even higher VIX,” he said in emailed comments.