how much more pain and how long will it take

With stocks, bonds, and cryptocurrencies plummeting, inflation spiraling out of control, and months of Federal Reserve tightening to come, it’s starting to look like everything that can go wrong in the financial markets is happening. Panic is in the air.

For traders looking for a silver lining, this is the best thing to say.

The S&P 500 is down nearly 9% in three days, a massive stretch that has left virtually nothing unscathed, including energy stocks, the year’s best-performing group.

Bond sales accelerated, with 10-year Treasury yields reaching their highest levels since 2011 and two-year rates hitting their highest levels since the financial crisis.

The cost of protecting investment-grade debt from default has skyrocketed, and the ETF that tracks the sector has fallen to its lowest level since March 2020.

Could it be worse? Yes. History is replete with examples of premature bullishness. The foundations turn out to be false, the data gets uglier, and things that seemed cheap turn out to be expensive in a day. For people who see seller exhaustion as a useful signal, it can at least be said that the process is underway.

How long this still has to go is unknown, although there are indicators that have helped in the past.

“It’s always tricky,” said Nancy Tengler, CEO and chief investment officer of Laffer Tengler Investments, on how to tell the start of a market sell-off from the end. “Usually, among other things, you are looking for panic selling,” she said.

“The question is, how much more will it hurt and how long will it take?”

The flames of the recession are fanning the consensus that sky-high inflation will require a more aggressive response from the Fed to bring it under control, which in turn will slow US economic growth.

Money markets see the final central bank rate at 4% for the first time and expect it to reach that level by the middle of next year. Some segments of the market see the Fed taking extreme measures this week, and some banks are not ruling out a potential 100 basis point hike.

At 3750, the S&P 500 is now trading at just over 15 times its estimated 2023 earnings, approaching the lower end of its valuation range over the past decade. At the best of times, this could give rise to the belief that the end of sales is near.

Now, when emotions rule the markets, there is very little reason to be bullish.

Strategists and charters say they expect big volumes, a spike in the Cboe volatility indicator, stock spikes and capitulations on behalf of a cohort of retail investors.

Stocks will have a hard time recovering unless the VIX hits 40, a level that Evercore ISI strategist Julian Emanuel says would mark a “cathartic surge.” On Monday, the volatility indicator rose above 34.

US exchanges traded more than 15 billion shares on Monday, up 3 billion from the average this year.

Meanwhile, Dave Lutz of JonesTrading maintains a “surrender list”. He is starting to notice more panic and is watching to see if the VIX hits 38, the level it reached in February.

The S&P 500 put-to-call ratio is nearing a yearly high, another sign that a potential easing of bearish sentiment is at hand. On the other hand, the relative strength indicator of the index is at 32, which is above the level indicating an oversold condition.

Monday’s session also marked a “big drawdown” day with extreme latitude, Lutz said. All but five stocks in the benchmark index fell. Meanwhile, retail investors “are starting to get hurt enough. They are definitely scared,” he said.

Sales earlier in the week were relentless. Energy, the sector with the best performance of the year, lost more than 5%, which was the worst performance in more than a month.

All the nervousness about the Fed’s actions has revived the recession warnings of economists who see the Fed raising rates at a rate that will not allow the economy to avoid recession. The chief executive officer of Morgan Stanley said he estimates the risk of a recession in the US at about 50%.

“It’s going to be a recession,” said Victoria Green, chief investment officer at G Squared Private Wealth. “It’s funny that we still have recession deniers. I don’t see how it won’t drag on into a recession just because of the drastic steps the Fed will have to take.”

The bear market hit its mark faster than average this year. According to Bespoke Investment Group, the S&P 500 typically takes 244 days to drop 20% from its peak.

The current one took only 161 days. And in more than half of the 14 bear markets since World War II, the index bottomed out within two months of breaking the 20 percent threshold.

The S&P 500’s break below 3850 on Monday could be just the start of even sharper selling that could push the index to 3200, or more than 30% below January’s levels, according to Lori Calvasina, head of US equities strategy at RBC Capital Markets. maxima.

That would be “in line with the average recession trough from the S&P 500’s peak to the trough since the 1930s,” she wrote in the report.

Calvasina also notes that such a decline would be similar to the early 2020 Covid sell-off, “making us think it’s a reasonable starting point for thinking about how low the S&P 500 could fall this time around in a recession.”

Elsewhere, however, Saira Malik, CIO at Nuveen, sees opportunities in growth stocks. The cohort suffered losses during May that were five times those of its peers in terms of value.

Price-to-earnings multiples for growth and technology look potentially more “attractive” and while inflation containment remains elusive, a plateau could soon emerge. “Tough times for growth stocks continue, but we are seeing glimpses in the dark,” she wrote.

However, while it may be true that traders want to see the VIX higher than it currently is before they can scream surrender, it’s hard to give a clear definition of what a washout event actually looks like, according to Art Hogan. , chief market strategist at National Securities.

“The surrender point is probably closer today than it was a month ago,” Hogan said in an interview. “But unfortunately, in the real world, you can’t set strict rules about what panic selling and surrender look like.”


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