Looking for the bottom on this plunge or bear market (true bear in the NASDAQ and near bear market in the Standard & Poor’s 500)?
Despite the pain we’re all feeling in our portfolios, I think we’ve got a way to go.
I base that conclusion on both the major economic trends still ahead of us and recent stock market action.
A capitulation is that “Sell everything” moment that often marks the bottom of a bear market or a major market plunge. Investors give up hope across the board and sell the good stuff as well as whatever speculative positions they’ve held onto in one big panicky flush.
A capitulation typically then puts a floor under prices and the market begins to rebuild value from there.
I think we’re a long way from that kind of capitulation because:
1. While stocks have priced in the next three Federal Reserve interest rate increases–June, July, and September–I don’t think investors have yet priced in the vey real possibility that the Fed will have to keep aggressively raising interest rates after September in order to bring inflation down to high but acceptable levels. And stocks certainly haven’t priced in a recession in 2023 or 2024 and the very real possibility (again) that this cycle of inflation, with its strong structural, supply-chain element, will not succumb to Federal Reserve policy until the Fed crushes demand with a real recession.
2. Stock-market action isn’t showing the kind of “Sell everything” sentiment that’s associated with a capitulation. To show you what I mean I draw your attention not to the move higher today, May 23 when the Standard & Poor’s 500 gained 1.86% at the close, the Dow Jones Industrial Average closed higher by 1.98%, and the NASDAQ Composite picked up 1.68%. On strong rebound days like today, everything ought to be up (and the action to watch is in those stocks that fell in the face of this strong bounce.) No, the day to look at to see how far we are from capitulation is last Thursday, May 19, when much of the market was down hard. Apple (AAPL), for example, lost 2.46% on the day. Walmart (WMT) dropped 2.74%. JPMorgan Chase (JPM) lost 1.48%. And Coca-Cola (KO) fell 1.96%. This had some of the sell even the good stuff quality I expect from a capitulation. But lots of more speculative stocks gained on the day and gained significantly. Electric-car charger stock EVgo (EVGO) gained 4.33%. Digital ad platform The Trade Desk (TTD) moved up 5.71%. Green hydrogen producer Nel (NLLSF) was up 6.66%. And, to put the speculative icing on the cake, GameStop (GME) rose 8.43%. These aren’t the kind of gains in speculative stocks that I expect to see in a capitulation.
It looks to me like investors and traders still think there’s money to be made in this stock market. In the short-term of the next two months or so, I tend to agree. After that though? Be very careful. My inclination remains to buy only very selectively and to, general, to sell into rallies and bounces.
