It may be a bear market, but it’s not panic. It’s worrying

(Bloomberg) – It’s hard to see, impossible to predict, and a nightmare to trade. But has the S&P 500 slide been an unreasonable panic to this day? Not by some measures, and it could be bad for equity in the near term.

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Even after the US stock benchmark fell 20% off a record for the first time since March 2020, trading volume is quite average and the Cboe volatility index is below this month’s high. Meanwhile, the Cboe SKEW index – the underlying volatility for bearish S&P 500 put contracts on call – is near a two-year low.

The relative lack of concern from the reverse lens is not necessarily a good thing. According to Max Gokhman of AlphaTrAI, the path of the S&P 500 has remained relatively orderly without any apparent panic, meaning that the lower part is still not visible. The level of a Federal Reserve that intends to look past the turmoil in the wake of tight financial conditions, and the outlook is bleak.

“Investors may end up holding their breath because there is more to this drop before the roller-coaster year begins,” said Gokhman, the firm’s chief investment officer. “With the Fed as the operator of the ride, we should not expect a soft back from the station. Only one-third of the austerity has ended without a recession, and it all started when inflation was below 3.3%. “

Do not rush to leave

Stock fall trading has been accompanied by a surge. The S&P 500 fell another 4.8%, but volumes on the US exchange did not increase this week. This is consistent with the level seen throughout the turbulent year.

“Volumes aren’t impressive or overwhelming. I like to see a volume increase to feel more confident about the bottom,” said Chris Murphy, co-head of derivative strategies at Suskehanna International Group.

The ‘fear gauge’ still couldn’t shake

“We have fears, we have doubts, we have anger, but we do not surrender. We don’t have stock-dumping people yet, and I think it will come, “said SentimentTrader analyst Jay Kepel in a Bloomberg Television interview on Friday. “Wake me up when it’s 45, because if you look at history, all the big falls, it spikes to 40 or 45, so 30 isn’t going to do it.”

The VIX is currently around 32.

Julian Emanuel, chief equity and quantitative strategist at Evercore ISI, looks at three things for signs of surrender: VIX above 40, put / call ratio to 1.35, and shares above 20 billion.

“The end of the correction is often accompanied by fear and surrender – extreme instability and trading volume,” he wrote in a recent note.

Piper Sandler’s chief market technician Craig W. Johnson is also looking to get the VIX up to 40, using a proprietary technical indicator he calls a “40-week strategy” to determine how many stocks they have above or below 40. By measuring. -Walking moving average. That gauge has dropped to 13% and he is waiting for the “sub-10% washed-out reading”.

“We have found readings below 10% which have historically indicated that the broader market is nearing a turning point,” he wrote in a note.

Single-stock signal

The Cboe SKEW Index – the underlying volatility for the bearish S&P 500 Putt deal subject to the call – is the lowest since April 2020. Meanwhile, the put-to-call ratio, which tracks the volume of options associated with individual companies, jumped to 1.27, still looking for Evercore’s Emanuel below the threshold.

“Even if the volatility of the index doesn’t crack, you can see it in single stocks,” said Amy W. Silverman, an equity derivatives strategist at RBC Capital Markets. “If the single stock is cracked, it eventually leads to the index level.” Wu for example Walmart Inc. And pointing to Target Corp.’s response – both cut their biggest post-ornaments in decades earlier this week.

Keep a close eye on the assessment

Mike Mulani, director of global market research at Boston Partners, said further margin contraction is possible. “There’s probably a worse side for the market right now, which is the opposite,” he said over the phone.

He’s going to come down and seek analyst correction being undervalued.

“The 64,000 question is whether we can achieve a soft landing or push into recession,” he said. “If the Fed wants to meet their inflation targets, we are in a recession rather than a soft-landing camp.” A downturn could push the S&P 500 earnings to around 13 times, and it could signal an area where “almost everything in the market is discounted.”

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