In our Morning Comment yesterday morning, we highlighted several signs of capitulation that we were observing. We also said that although a near-term bottom might not come immediately (Thursday), we did expect one to begin very, very soon. Well, we saw even more severe signs of capitulation during yesterday’s action. For instance, total composite volume was 7.1bn shares. We’ve only seen 1 day since 2011 that had more volume than that (and that was a “quadruple witch” expiration day in June of 2016). We’d also mention that volume this week has averaged 6.6bn shares a day…which is basically double what the average daily volume has been over the past 12 months! Extraordinary high volume is a sign of panic/capitulation.
As for breadth, the advancers vs. decliners on the S&P 500 was 504 to 1 negative yesterday. That’s right, there was only ONE stock in the S&P 500 that finished in positive territory yesterday (and yes, there are 505 stocks in the S&P 500.) It was 32 to 1 negative for the NYSE Composite index…27 to 1 negative for the Russell 2000…and 19 to 1 negative for the Nasdaq Composite. We’d also point out that there were ZERO stocks that finished in positive territory in both the DJIA and the NDX Nasdaq 100 index…30 to 0 for the DJIA and 103 to 0 for the NDX.……We’d also note that yesterday was a “90% down-day”…as the “down volume” was more than 90% of the total volume (actually more than 95%)…..On top of all this, the number of stocks hitting a new 52 week lows was over 2,000 stocks (2,377)!!!!!!.......Finally, we’ point out that the DSI data shows that bullishness amongst futures trades fell to only 5% for both the SPX and NDX…so it sure seems like almost everybody is on the bearish side of the boat.
We’d also highlight that based on its weekly RSI chart, the S&P 500 index is more oversold than it has been at any other time since the financial crisis…and back then, it didn’t get to that extreme on its initial decline. (In fact, the SPX saw two bounces of 7% and two bounces of 11% between the 2007 top and the time its weekly RSI fell into oversold territory (below 30) in October of 2008 and bottomed at just below 17 later that month.) (First chart attached below.)
As oversold as the S&P 500 has become, the Russell 2000 is even MORE oversold. Its weekly RSI chart fell below 20 yesterday…before closing just above that level. Its 20.40 reading is more oversold than it was at the lows of 2008/2009…and is right in-line with the extreme readings it saw at the short-term lows in 1998 & 1990! Only the low of the 1987 crash gave us a more oversold reading on this indicator!....Of course, the Relative Strength Index is not only indicator out there…and markets can remain oversold for a while. However, they tend to stay extremely oversold for a much shorter time frame than they stay extremely overbought, so we think these are some pretty compelling developments. (Second chart below.)
Of course, none of this means that the market is going to bounce today or even Monday. In today’s markets, everything seems to happen a lot quicker. Therefore, maybe this sharp correction/bear market will not have any strong bounces before it sees its ultimate bottom. Maybe it will fall in a straight line. However, these are the kinds of extreme readings that usually don’t last very long on a short-term basis…EVEN if the stock market ends up falling a lot further over an intermediate and/or long-term basis. Therefore, those who are short stocks might want to be very, very careful over the next week or so.
Another reason to worry that we might not see a short-term bottom in the next few trading days is that is sure seems like investors are waiting to see some definitive signs from Congress that a sizeable fiscal stimulus package in going to be passed soon. If history is any guide, that might not happen until we see one more BIG flush in the markets…..Remember when the idiots in Congress failed to pass the TARP package on the first vote? It wasn’t until the stock market saw yet another melt-down that Congress got off their duffs and passed it. It seems like they have to be staring into the abyss before they do anything consequential. If that is true again this time around, we just might indeed need to see another flush lower before we bottom. (However, that won’t take long if they decide to continue to sit on their hands.)
Maybe we should wish for that to happen. It’s an election year, and if Congress is the reason this stock market crash becomes even worse, a lot of those clowns will get voted out of office!!!
Of course, when the futures are trading “up limit” like they are this morning, it’s easy to declare that the stock market is going to bounce. However, we’re talking about a bounce that will last for more than just one or two days. Also, we talked about a short-term bounce starting soon yesterday morning…when the futures were down in a substantial way. More importantly, the evidence we provided above is very, very compelling. In other words, any idiot could say the market was going to bounce for one day today, but we’re calling for one that will last for at least a little while and should be quite sharp. Therefore…and as we said yesterday morning, “Don’t sell the next bounce”.
However, what we’re really saying is, “Don’t sell the next bounce immediately.” It looks like we have a long way to go before the coronavirus is contained…and before the problems between OPEC and Russia are solved. Therefore, it is not out of the question at all that we’ll see another decline…maybe even another material decline…before we get the ultimate bottom for this move. Let’s face it, the vast majority of deep corrections/bear markets see a retest (or slight undercut) of their initial lows before a sustainable rally is achieved. Thus investors are going to have to stay nimble. However, the evidence that has built-up in recent days tells us that this morning’s bounce should last longer than the other 1-day bounces we have seen over the past couple of weeks. So investors should be less aggressive on the sell-side at the very beginning of this bounce…and short sellers should be very, very careful. It does NOT, however, mean that investors should jumping back into the market with both feet.
Needless to say, if this morning’s rally fails…and the stock market rolls over and closes in negative territory again right in front of the weekend…it’s going to scare the hell out of everybody. (However, we used the phrase “closes in negative territory” on purpose. We could see a midday swoon like we saw on Tuesday, but as long as the bounce re-establishes itself by late in the afternoon (like it did on Tuesday), things will be fine.) That said, if we do indeed see a major “failure” today, those members of Congress who decided to go home for a long weekend yesterday…might as well stay home…because they’re never going to get re-elected!
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Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.