According to JPMorgan's Delta-One desk, which late last week - around the time its traders capitulated - published a note in which it was "digging for a bottom", some indicators have started to price in a bottom, while others, as one would expect, have not.
Focusing on the former first, the bank's Delta-1 traders Manish Sinha and Andrew Lu write the following.
1. Technical: Market Breadth and Momentum Signals
- Breadth is defined as percentage of SPX constituents trading above 200D Moving Average.
- Momentum is defined here as the percentage of SPX constituents trading above 70 RSI vs percentage trading below 30 RSI.
Often, the signal for the market approaching a near-term bottom is when Breadth is below 20 and Momentum is below -20%. After the signal period, a recovery occurs in both Breadth and Momentum, which further enhances the recovery in the short term.
In the short term, the market often bottoms out during the active signal period. While the signal usually lasts for less than 10 days, it lasted for longer during periods of more extreme scenarios.
- Examples: 2002 Tech Bubble, 2008 Lehman Bankruptcy, and 2020 COVID Pandemic.
We saw this signal starting into Friday’s close, 9/23/2022.
2. Pure Equity Factor-Based Sentiments Signal
JPM constructed a Long custom Risk-on Factor (Long Beta, Residual Volatility, and Leverage) vs a Short Risk-off Factor (Size, Profitability, and Earnings Quality).
- Looking at the 3 month rolling return Z-score of the Risk-on / Risk-off PAIR provides the overall market risk vs defensive sentiments.
- Often, the market bottoms during the extreme defensive nature of trading flows.
Current value is at neutral level, hinting that the market may not be over-defensive yet, which often shows during the past events of extreme sell offs.
3. Equity Valuations
So far, the market correction has been a function of rates. SPX Earnings Yield over 10 Year Yield is still well below its past 10 year average.
High Yield Spreads have reached the level of past earnings slowdown periods. Wider Equity Spreads would give greater confidence in finding a more definitive market bottom.