5 Signs Of A Tradable Bottom For US Stocks

Via Nicholas Colas of DataTrekResearch.com,

By now you know the drill: volatile markets mean we make these notes super-efficient so you can get what you need and let you move on to the 157 other items in your inbox tonight…

“Too late to sell, too early to buy.” That about sums up the state of US markets at the moment. Barring some deus ex machina headline in the morning (“Fed Is Now Concerned About Rapidly Falling Stock Prices” seems unlikely), we run the risk of one of those bad Friday-Monday market sequences.

Still, with volatility comes opportunity. That’s the funny thing about stock market corrections: plenty of investors bemoaned the lack of a pullback over the past year. Now that we have one, they are absent. As a trading desk buddy once put it to me, as he entered orders far below the market on a bad day in late 2000, “I’m a bidder, Nicky, not a buyer…”

So how do we know the point of maximum pain for US stocks, where we can shift from just bidding to buying? A few things I will be looking for to buy stocks for myself in the coming days:

#1: The VIX hits 40/60/80 and then starts to decline. The CBOE VIX Index closed at 33 today and was as high as 46 on Tuesday. That latter print was largely caused by the drama surrounding the VIX ETF complex, but I have little doubt we’ll see an honest 40-handle VIX soon enough.

Very important: The trick to using the VIX to find a bottom is to understand that the highs DON’T signal the lows for stocks. During the Financial Crisis, the VIX got to 70 in October 2008. The lows were 6 months later in March 2009. In 2010, the VIX peaked in May; stocks troughed in June… You get the idea.

It is a declining VIX (often over weeks, not days) that sets the floor for stocks, not a peaky top. So even if this week was the high water mark for the VIX in this correction, we may well see stocks slip further.

#2: Tech Stocks Finally Feel the Heat. Even after the last week, large cap Technology is still outperforming for the year (down 3.0% versus 3.5% for the S&P 500). Amazon, a company with little in the way of cash flow and in the middle of assimilating a large acquisition, is up 15.5% year to date. Facebook is only down 3% on the year. Google is only 4% lower in 2018.

We like Tech, so don’t get us wrong, but any final flush for US equity markets has to pull this group much lower and very quickly. High beta stocks with lofty valuations are not parking lots to sit out a stock decline.

One big reason we don’t think US stocks have bottomed: this hasn’t happened yet. It started today, right at the close, with the AMZN/FB/GOOG/AAPL/MSFT selling off 1-2% in the final hour. We’ll see if there is any follow through tomorrow.

#3: Retail Investors Give Up On Stocks Again. The only screen I was watching as closely as the market action was the Google Trend analysis for the search term “stock market”. A burst of interest at the close would indicate a high likelihood of an outsized down open tomorrow (and a chance for a low).

It didn’t happen; the volume Google searches for “stock market” at 4pmtoday were half of those at the close on Monday. We’ll see how the open goestomorrow, but it doesn’t seem like retail will be as engaged (i.e. selling) as the deeply discounted open on Tuesday.

#4: It’s not a low until there is a retest. A lot of investors/traders get bogged down in thinking they have to catch the low of any market correction. But just look at the chart of any bear market or major correction: any turn higher takes time. OK, one exception: the “Devil’s Low” on the S&P 500 in March 2009 at 666 intraday. That’s the only V bottom I can think of in 30 years of watching markets. Generally, washing things out takes time.

#5: (Most Important) – Someone Knows More Than You. I have had friends lose their jobs and ruin their careers in every market downturn because they thought they had the best call on a stock or the sharpest view of the market. They never did.

Major market pullbacks/corrections/crashes/whatever are rarely the time to take outsized risk, personally, professionally or financially. Small amounts of capital deployed anywhere near a bottom reap outsized returns. There is no need to go big, unless you want to run the risk of being sent home.

Comments

whatswhat1@yahoo.com Fri, 02/09/2018 - 13:50 Permalink

Back in the day, penis envy was huge.  These days, at least here, where everyone is an avatar, penis envy has been replaced with "first" envy. 

 

Down vote me, please.

Down is the new Up.

 

(paint chip eaters don't know which way to vote now)

 

The caffeine is wearing off and the snow is piling up.  I'd better be done farting around here and start digging a hole like the stawk market.

Market more like a DP (double penetration) today.

Kafir Goyim whatswhat1@yahoo.com Fri, 02/09/2018 - 14:00 Permalink

The Dow is all the way down to it's November 24th, 2017 level!  Oh my God!  This has to be the bottom.  No way it could go lower than November 24th, 2017.  That was so long ago and nobody said the market was in a bubble in November!

I will repost this bottom prediction till we're back to 2012 levels, and perhaps further.  This shitshow has been going a long, long, time.

In reply to by whatswhat1@yahoo.com

eclectic syncretist glenlloyd Fri, 02/09/2018 - 14:48 Permalink

Or you could just read here and let me or another experienced trader recognize and point out a selling climax that would signal at least a short-term bottom. In any case, with the Fed boxed into raising interest rates, and the trillions of overseas dollars set to return to America. the dollar is on a snide trip down that spells disaster for equities until such time as inflation (possibly, and not anytime soon I hope) gets so bad stocks soar like they are in Venezuela.

In reply to by glenlloyd

whatswhat1@yahoo.com Fri, 02/09/2018 - 13:50 Permalink

< ... DOW CLOSES DOWN UNDER 1000 (ppt materializes)

< ... DOW CLOSES DOWN OVER 1000 (fear of Monday's becomes a new psych. disease-Big Pharma gets to work on a pill)

 

dead cat bounce at 1PM CST? we're almost up to the opening price

DavidFL Fri, 02/09/2018 - 13:53 Permalink

Never too late to sell! Gotta love all these guys who can see the future. If they actually had that gift, us minions would never hear of or from them! 

"...the trick is using the VIX to find a bottom" "It is a declining VIX which sets the floor"; perhaps the author would be interested to know the VIX is rising!! WTF

Squid Viscous Fri, 02/09/2018 - 13:57 Permalink

wow this guy really, really  knows his shit,

why does he work for "Data Trek Research?"

wtf is that? pimping his shitty advice website, should be on a fucking 150 ft. yacht in BVI

Hoffman Lenz Fri, 02/09/2018 - 14:05 Permalink

I've been watching the DJ for a bit. I'd say the PPT are earning their money today.

 

[edit] 14:55 DJ time. This is gonna be close. Come on PPT, 3/10 must try harder.

[edit] 14:57 How come I can edit my original post? Oi!!! Tyler. That's bad. I could change it to anything. Get it sorted.

[edit] 15:10 DJ time. PPT are losing. Come on you MOFO's. It's not like it's your money.

[edit] 15:32 DJ time. It looks like the PPT have won this round.

[edit[ 15:42 DJ time: I'd say this is close enough to call it.

PPT 1 - 0 Rest of the World

The only markets in the world to end green. Even VIX was brought into line.

-----------------------------------------------------------------------------------------------

I don't like the fact that I can alter my original post once there's a reply. I could change it to anything I like. For instance:

I'm stood here naked, in front of the mirror, with the window open. There's quite a breeze, and it's moving my 'luggage' from side to side.

That makes Peacefulwarriors' vvvv reply sound a bit gay.

Blue Dog Fri, 02/09/2018 - 14:17 Permalink

No, you get every last dime you can out of the market as soon as you can. It's better to pay the penalty on your 401k and get what you can while you can.