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I hate to sound like a broken record, but the market still looks lousy. The Monday/Tuesday bounce rolled over and failed today as the S&P and Dow took out their lows. (And the Nasdaq just missed this level.) If you’re a long-only investor and you’re making money then you’re a stock picking genius. The easy money continues to be on the short side.
The one positive in the market right now is the negative sentiment. The number of bears is increasing and anxiety is rising. Several measures of fear/bearishness are beginning to reach extremes. When this happens, the market has a better chance of rallying.
Due to this bearishness, I’m seeing a lot of talk of “capitulation” and “bottoms”. Prognosticators are saying that because their bull/bear/fear/greed/anxiety indicators are starting to flash, that means everyone is panicked and the market is due to bottom. Don’t believe it.
Let’s take a step back and put the current selloff into some real context. The S&P 500 is down 7.5% from its highs. The Dow is down 9%. The Nasdaq, which always has bigger swings, is down 13%. These are not scary numbers. The Dow and the S&P wouldn’t even qualify as a standard 10% correction yet. In fact, they haven’t had a 10% correction since the market began rallying in March 2003. They came close last August, but never quite got there. The levels they are trading at are 5-month lows. Five months. Big deal. That means over the last 5 months, most mutual fund investors are breaking even. THAT is supposed to put them into a selling frenzy?
I simply don’t believe that a 7.5% S&P decline down to levels we were at in November is causing the general public any amount of extreme fear or panic. Sentiment indicators may be saying different, but capitulation occurs when things get really scary, and so far…eh…not so scary.
Due to this “extreme bearishness”, a bounce may not be far away. But I trust that is all it will be at this point. I believe that to truly scare people and have a washout that creates a significant bottom, things are going to need to get worse. Maybe much worse. Only time will tell.
Good trading,
Rob
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