Stock market: the bottom of the stock market recedes after 13 years of downward buying

Thirteen years after equities hit their financial crisis low and two years after the Covid capitulation, stock bulls are once again hoping that March will be the month a spiraling market finds its bottom.

Their faith is being tested.

Pockets of resilience have emerged over the past five days, although stocks have slipped further amid soaring inflation and war in Europe. The S&P 500’s biggest one-day drop since 2020 was closely followed by its biggest rally, and every session except Monday featured at least one notable rebound.

It’s been that way this week, and it’s been that way since March 2009, when the buy-down ethic was born as the Federal Reserve flooded the financial system with money to end the financial crisis. . Whether the bulls will be rewarded for their courage this time, when no such help is likely, is the most pressing question in the markets.

“After a long period without volatility, we have so much volatility,” said Sarah Hunt, portfolio manager for Alpine Woods Capital Investors, in an interview on Bloomberg TV. “It’s a very different environment to what we’ve been in for the past few years.”


The week started with a sharp downtrend before a 2.6% rebound on Wednesday – 13 years to the day the market hit bottom after the financial crisis. That didn’t hold up until the end of the week, with shares slipping another 1.7% to end the five days down almost 3%.

But the two-week recession since the start of the war has not deterred retail investors from trying to predict the end of the market decline. In the week to March 9, investors poured $8.8 billion into U.S.-focused equity funds, the most in a month, according to EPFR Global data compiled by Bank of America Corp. . Retail investors bought $1.7 billion net worth of stocks in the week ending Thursday, extending a two-month frenzy that JPMorgan Chase & Co. said was the biggest at this point in at least five years. years.

Strategists and fund managers have been looking for signals to determine whether this retail optimism will be rewarded – as has been the case time and time again in the post-crisis, anyone who came close to it in March 2020 potentially doubling its money in 16 months.

A lens considers the history of past corrections. According to Leuthold Group, anyone who bought the S&P 500 on the day it hit a 10% decline since 1960 would have been sitting in profits 81% of the time a year later. The average gain of 12% compares to an average return of 9% over all periods.

As tempting as this outcome was, an investor had to be prepared for a lot of short-term stress to get there, with losses often hitting double digits. To avoid the worst days, Doug Ramsey, chief investment officer of Leuthold, believed it was best to buy the dip 25 days after the market initially entered a correction. This would only lead to a maximum decline of 3.6% in the first month.


Another parameter to consider is the unemployment rate, a factor that informs about the stage of an economic cycle. Ramsey found that buying off the hook is safer at the start or middle of an economic expansion than during a maturing phase – like now. Bargain hunting when the unemployment rate was above 5% produced a 12-month return of 16%, compared to 6% when the unemployment rate was below.

“Analysts who entered the business in 2009 or later have experienced nothing but big gains buying the dips,” he said.

Keith Lerner, co-chief investment officer and chief market strategist at Truist Advisory Services, reviews options market indexes to see if those bets will pay off. He is watching for a spike in the put-call ratio, which would signify demand for downside insurance. It also monitors sentiment polls, which tend to give opposite signals. He wants to see “extreme buying pressure, a buying spurt”, i.e. a day with huge volumes.

“You really want to see the buyers come in strong. That, along with strong width readings, often marks a bottom,” he said by phone.

Changing investor attitudes are also of interest to iCapital’s Anastasia Amoroso, although she is particularly focused on a “surrender” in sentiment and how this may be reflected in positioning. She notes that while hedge fund net leverage is down from 2021 record highs, it has not hit 2020 lows, also adding that bottom buying and overall fund flows to global equities resisted at the beginning of the year.

“History tells us that the more capitulations we see in these metrics, the greater the upside potential for the market in the following months,” Amoroso said in a note dated March 9. “Given the rapid pace of developments and the continued reduction of hedge fund positions this week, we will be monitoring these positioning measures closely.

Yet caution abounds despite the tools available to strategists, especially for those who remember all too well the challenges of calling a bottom during times of historic financial stress.

Take Max Gokhman, chief investment officer for AlphaTrAI, for example. In March 2020, he was optimistic about the fiscal stimulus that was on offer. The crash of 2008, on the other hand, had many more variables at play, clouding the outlook, and the current period is closer to that. Consumer confidence has deteriorated, there is a wage problem even with a tight labor market and the yield curve could soon invert, he said.

“I’ve had people contact me, is this the bottom line and are we actually able to buy the dip?” he said on the phone. “For me, it doesn’t seem like the time to buy the dip just yet. I think there will be that point this year, but I don’t think we’re there yet.


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