CHART LEGEND

Red box = Resistance zone            

Green box = Potential market bottom zone

Since the S&P 500 sank to its year-low level at 3,491.58 points on 13 October this year, the index has rallied over 15% and is now holding above the 4,000 mark. The Volatility S&P 500 Index (VIX) or Wall Street’s “fear gauge” also fell back under 20, one of its lowest levels this year. Just recently, the Federal Reserve Chair Jerome Powell signaled for a slower pace of interest rate hikes going forward, which the central bank could implement as soon as the upcoming Fed meeting in mid December. This recent wave of positivity has led many investors to ponder if we have witnessed the bottom for stocks in this inflation crisis, and if we are finally on the upswing for good or whether they should brace for yet another temporary bear market rally.

Looking at S&P 500’s monthly chart, we are still trading within a downtrend channel formed since the market peaked in January this year, with the 4,100-4,300 points zone a strong immediate resistance area. To make a strong case that the US market has bottomed, it is preferred the index continues to pull back in this downtrend channel closer to the 3,200 mark in the support zone of 3,000-3,300 points where it meets a confluence of a 61.8% Fibonacci retracement level measuring from the March 2020 bottom to the January 2022 peak, and also a retest of the long-term uptrend support line, which dates back to the market bottom after the 2007-08 Financial Crisis. This uptrend support line has proven to be an accurate gauge for market bottoms spanning back to the bottom in 2009, as since then it has called for the bottoms that occurred in 2011, 2016, 2018 and 2020. In addition, market bottoms are accompanied with  a spike in trading volumes, a sign we have not witnessed yet. The surge in volume is a good indcicator of a market bottom as it is known as “capitulation volume”. It is the dramatic surge in selling pressure in a declining market which signals the masses have thrown in the towel, and that can mark the end of a significant market downturn when a price rebound follows once the panic selling has run its course.

When we examine the Volatility S&P 500 Index (VIX) chart, past market bottoms have also been accompanied with sudden large spikes in the fear gauge, something we have not witnessed this year yet. 

Also, investors who look forward to a Fed pivot as a signal of bear market bottoms might be disappointed by what history has to say about the performance of the stock market following it. US stocks tend not to bottom until the Fed has cut interest rates and not immediately so. Since the turn of the century, it took time for the stock market to bottom out after the central bank enacted the first rate cut in a monetary easing cycle. In the rate cut cycles that began in 2001, 2007 and 2019, it took over 600,500 and 200 calendar days respectively between the initial rate cut and the actual market bottom. Considering the lag effect for interest rate changes to exert its effects on the US economy, it makes sense that market bottoms occur much later. If the current Fed funds rate forecast holds and history repeats itself, a stock market bottom might not be in the cards until sometime after the Fed begins rate cuts in future.

All in all, things might need to get worse before they get better, and investors may have to remain patient before deciding whether an investable low in stocks has truly arrived, or not. With the VIX near the year’s support levels, it is no time to be risk on especially with so much uncertainty plaguing the outlook for stocks – dimming expectations around corporate profits with many corporations cutting their profit guidance; inflation and recessionary fears; and the Russia-Ukraine conflict among the many factors. I don’t think we have seen the bottom of this bear market yet, and it is more likely we are going through yet another bear market rally with a lower low plausible before the S&P 500 could bottom out between 3,000-3,200 points.