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This is the daily notebook of Mike Santoli, CNBC’s senior markets commentator, with ideas about trends, stocks and market statistics. Finally, from the dark depths after a steep descent, the anticipated bounce emerges. The tape grew oversold enough, and traders became sufficiently desperate in their selling to cause both recent bears and hopeful bulls to conclude “enough for now.” As noted yesterday , the CNN Fear & Greed Index was nearly pinned at minimal levels, the active tactical traders of the National Association of Active Investment Managers survey was at near two-year lows in equity exposures. Numerous technical “selling exhaustion” signals flared. The S & P 500 flirted with a 20% decline before the mechanical limit orders stepped in: the machines mindful of a long history of sharp declines halting, or at least pausing, just shy of a down-20% close. Now what? Even those who believe the confirmed downtrend is in place and will remain so allow for the idea that the S & P 500 can rally another 5%-7% from here before running into some heavy friction. Remember that would merely take the S & P to the upper part of the 4,100-4,300 band that served as support for some three months before the latest spill. Many will watch to see if we close with 90%+ upside NYSE volume today, which is often taken as a sign of emerging buying momentum that could lend credence to the bounce scenario. The forward returns historically after we get the kind of sentiment washout and fairly quick 15%+ drop in stocks are generally favorable if you look out a year, but with a couple of huge downside exceptions (2000, 2008). This makes the recession/no-recession call fairly consequential in terms of handicapping further potential downside risk. It’s hard to see how earnings forecasts for the second half of the year don’t start to leak lower, but arguably the six P/E-point compression in S & P 500 valuation has somewhat taken account of that. Does the retrenchment from historically extreme valuation and concentrated premium-priced growth stock leadership stop at a roughly “neutral” valuation level like the 16x forward price-earnings we reached yesterday, or will the market do its typical overshoot routine? A genuine question, not entirely rhetorical. When the index sank to roughly 14x forward earnings at the end of the 2015-16 and 2018 corrections, it spent almost no time there. However, the scare and the breadth of damage in terms of stocks making new lows was more severe than we’ve seen so far this time. Is value now being surfaced at least in certain swaths of the market containing brand-name companies with steady, “quality” attributes? Arguably so. A scan of a particular quality growth basket surfaces these consumer, financial and media-related stocks pushed toward significant discounts to their decade-long average valuations. You definitely can step in value traps this way, but longer-term investors now seem to have long shopping lists to consider. Market lift after Federal Reserve Chair Jerome Powell’s comments about policy, the possibility of not achieving a soft landing, etc., imply things were roughly priced already with this set of issues in mind. Treasury yields up but well below recent highs, more a relaxation of recent flight from risk than an aggressive rethink of Fed expectations. The Fed wants to do two, or ideally three, half-percent hikes this summer. We can debate whether something might rupture before then to change the plan or if inflation declines will offer some wiggle room, but that’s the presumed timeline markets are already working with. So far market breadth is on track for one of those 90% upside volume sessions on both NYSE and Nasdaq. If it sticks, we’ll hear about “breadth thrusts” and how reliable they are or aren’t. The most obliterated stocks are up the most, which is only to be expected. VIX finally sinking below 30, perhaps vindicated for not shooting to 40 on the latest S & P 500 slide. It says ongoing bumpiness should be expected but no acute stress in the system. Four in every 10 trading days this year have seen at least a 2% intraday S & P 500 range, so this will have to settle down before VIX can start slipping toward more long-term normal levels closer to 20.
Traders on the floor of the NYSE, May 13, 2022.
Brendan McDermid | Reuters
This is the daily notebook of Mike Santoli, CNBC’s senior markets commentator, with ideas about trends, stocks and market statistics.
