To market veterans, talking about a stock market bottom after a mere 3% decline may seem odd, but these are the kind of global investors that currently live in, one charts watcher says.
As stocks climbed in 2021, reaching new highs as recently as last week, fewer and fewer individual stocks were part of the move, technical analyst Andrew Adams said in a note Wednesday for Leap Strategy. This narrowing width is what is now sending a trough signal, although the indices have not suffered any steep drops.
Stocks were hit hard on Monday, accelerating a sell-off that started late last week and left the S&P 500 SPX,
down 2.9% from its record July 12 close. The Dow Jones Industrial Average DJIA,
Monday suffered its biggest drop in one day since October. The S&P 500, the Dow and the Nasdaq Composite COMP,
then rebounded on Tuesday and Wednesday, taking back all the lost ground.
In a single graph: Why the S&P 500 could be on the verge of falling 5% or even more this summer
While Monday’s moves were spectacular, the scale of the sell-off was not what would normally have been the talk of a wiping, given larger pullbacks of at least 5% are relatively common.
But a glance under the hood shows that the scope of the market has narrowed since February, Adams said.
Several individual stocks have fallen 10%, 20% or more from their previous rally highs, he said. As a result, it didn’t take much damage to the S&P 500 or Nasdaq averages to get to the point, in terms of magnitude, that signaled past market lows.
It’s strange to talk about a bottom after only a 3% drop in the S&P 500, but, again, it’s an odd market right now, he said.
Adams explained that during a legitimate market pullback, less than 30% of stocks on the New York Stock Exchange and Nasdaq remain above their 50-day moving averages. Readings below this threshold represent a washed-out market, which is likely on the verge of oversold and attractive to traders keen to buy the downside, he said.
Having less than 30% of stocks above the 50-day average does not guarantee that the market is at its bottom, but it is usually a sign that investors can have more confidence and start adding risk, did he declare.
It’s a similar story for the S&P 500, with pullbacks testing the own 50-day moving average of indices that have proven to be common over the past year. Indeed, this week’s rebound came as the S&P 500 held support at the 50-day average, although only 25% of NYSE and Nasdaq stocks were above their individual 50-day averages. Adams noted.
So, is everything good for bulls? Not so fast.
Given the weakness and general market rotation recently, it is still difficult for me to advise to buy anything during such a slight drop in the S&P, he said, adding that the S&P 500 and the Nasdaq still face long term resistance near their recent highs.
Until the market gets over these areas, the risk / reward outlook for indices remains quite poor, he said.
It doesn’t necessarily mean that there still won’t be buying opportunities, because it’s still more of a stock market than a stock market, Adams said, I think we need to continue to be selective and do our best to stay on top of these rotations.