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.