Those “C” words describe recent market action as headlines of bank runs and more consume the news. Our data doesn’t dispute those feelings.
Let’s brush aside headlines and focus on unemotional data.
Investors are searching for a stock market bottom. It’ll come. However, our proprietary algos point to further downside near-term. That’s the bad news.
The great news is major selloffs eventually preface massive uptrends. That’s always our angle here at MAPsignals… the opportunity.
Today, I’ll illustrate the supply and demand picture of why stocks are under heavy pressure. More importantly, I’ll give you the signal to heed that a bottom is close.
Searching for a Stock Market Bottom
News flows report what’s already happened. Money flows alert you to real-time supply and demand trends. Focus on the latter when searching for a market bottom.
There’s no simpler indicator to understand than our Big Money Index (BMI). When it’s free-falling like now, heavy selling is weighing on equities.
I’ve hammered a cautious stance for over a month. That’s due to the downtrend in the BMI. Notice how it’s dropping daily. A reading of 43% means it’s fallen nearly 40 points in a month:
That’s a swift down move. The decline alone isn’t enough to tell us the magnitude of selling taking place. Notice how today’s BMI is well below the January reading. This indicates much more destruction under the surface.
A great way to visualize how intense trading has been this week, check out the following chart. It displays the number of stocks and ETFs trading on larger than average volumes. This is important because it highlights the magnitude of risk-off appetite.
Here are a couple of items to note:
- First, the last 4 trading days saw an average of 1285 stocks and ETFs trade on outsized volumes. That’s 85% of our institutional universe of 1500 tickers. That’s immense and points to heavy distress under the surface.
- Second, this level of trading dwarfs the pullback in January. Heavy trading indicates a major rush for liquidity.
When fear grips markets, trading levels expand. As stock prices fall, the level of selling increases. It’s a cascading effect. That’s been the case this week.
Notice how those 4 large days of trading align with hundreds of stocks getting sold. We’re now seeing the first signs of capitulation in 2023:
I’ve outlined last year’s capitulation events for comparison. Notice they are near market troughs.
Risk-off moments happen for different reasons, but through the lens of data they appear similar. The latest bout of selling is primarily focused in Financials (banks), Energy, and Healthcare groups. Chances are, we’ll see other groups follow suit.
Investors are searching for a stock market bottom, but the next datapoint indicates there’s more near-term downside ahead.
Recall that Tuesday was a big relief rally. The S&P 500 gained 1.65%. All things being equal, you’d imagine money was being put to work. Our data signaled a conflicting message where 17 stocks were bought and 97 stocks were sold.
That’s an 85% sell day, indicating traders were using the up-move to reduce risk. That further reinforces the narrative that more downside is ahead until lows can be formed:
As negative as this data looks, don’t forget that markets must travel a bumpy path to oversold conditions. Based on our internal analysis, we’re weeks away from potentially visiting an incredibly strong buy area: oversold conditions.
Below, plots these rare events and how they tend to foreshadow major uptrend reversals.
Here’s my post on the last time we visited the green area back in October. Uncertainty was high back then, but our data signaled better days ahead.
Crisis, capitulation, and carnage describe today’s environment. Don’t focus there. You’ll miss what’s eventually coming… the 2 “O” words – a rare oversold opportunity.
Stocks will bottom when the BMI reaches oversold and eventually turns higher. That’s the signal that selling has ceased, paving the next uptrend.
If you want to hear more of my thoughts on this very subject, listen to my volatility update here from yesterday. In it, I breakdown the recent events and when we could reach the green zone.
Let’s wrap up.
Here’s the bottom line: When searching for a stock market bottom, turn to data. It’s emotionless and grounded in truth.
Stocks are under immense pressure right now as fears of a banking crisis loom. Based on the level of selling and trading under the surface, expect more near-term choppiness before a bottom is reached.
That’s only half the story though. We’re well on our way to a rare oversold event that often leads to big gains for stocks.
That’s worth preparing for.
Start getting your shopping list ready. Focus on quality. The best stocks bounce the hardest once our data signals it’s go time.
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Have a great week!