Opinion: ‘The sellout panic’ has taken over the stock, bond and crypto markets – and this may be the beginning of the end – CNET

The US stock market is experiencing a liquidation panic where everything is sold. The good news is that such panics usually don’t last long.

Analysis by Rob Hanna of Quantifiable Edges suggests a rare Inverse Zweig Breadth Thrust (ZBT). Although the sample size is small (n=10 since 1926), the bearish implications of the study are clear.

Breathe deeply. Notwithstanding that negative ZBTs were not part of Marty Zweig’s work as detailed in his book, “Winning on Wall Street,” this study is about to “torture the data until it speaks” about territory. While positive ZBTs are rare buy signals, there have been six cases since Zweig’s book was published in 1986. Can you really trust study results when the latest instance of a negative ZBT dates back to 1943?

Panic in the air

Two (unscientific) Twitter polls over the weekend testify to the sense of panic. Callum Thomas has been conducting a weekly poll since 2016, and the readings are at rock bottom. The weekly reading of the stock decline topped levels seen during the COVID-19 crash in 2020, although the four-week average was not.

Market analyst Helene Meisler conducts a similar poll over the weekend and the results are net bearish -20%. In the limited time she has conducted this survey, there have only been a few instances where readings have reached these levels:

While the sample size is small (n=5), four out of five samples saw the S&P 500 SPX,
-3.88%
bounce back the following week. In the one exception where the market showed a red candle, investors saw a “Turnaround Tuesday” rally that led to higher prices for the rest of the week.

Purely anecdotally, respondents in Meisler’s poll seem to have a shorter time horizon than in Thomas’s poll.

Some silver linings

I don’t mean to imply that this is the “bottom” as the US stock market is still facing valuation issues. But some silver linings are starting to appear in a series of dark clouds.

Let’s start with the long-term technical perspective. I highlighted the fact that the % above the 200-MA reached over 90% as the market recovered from the COVID Crash in 2020, which created a “good overbought lead” (top panel). The “good overbought” condition faded in the second quarter of 2021.

In the past, the market has touched the bottom of this indicator reached 15%. It is now around 20%. It’s getting closer. These pullbacks also ended when the % above their 50-MA (bottom panel) fell below 20% and this indicator has fallen to below 5% in the past. It is now there.

Technical conditions are consistent with long-term lows, although the market still lacks valuation support.

In short, technical conditions are consistent with long-term lows, although the market still lacks valuation support.

In the short term, the crypto space crashed over the weekend when Celsius halted redemptions and transfers. Not only did the episode spark fears that it was another case of fraud or a Ponzi scheme implosion, but it also had real cash implications.

Some crypto investors who had their holdings at Celsius facing margin calls had the choice of liquidating their positions or adding US dollars to an institution that did not allow withdrawals. The silver lining is that the performance of cryptocurrencies has been highly correlated with the relative performance of speculative growth stocks, as represented by ARKK. But is this a positive divergence that I see?

Waiting for the Fed

One development investors are watching is the FOMC announcement on Wednesday, and the event could bring some relief to risky assets. In the wake of the hot CPI print, the market is now pricing in a 30% chance of a 75 basis point hike on Wednesday. Moreover, he is discounting a series of rate hikes with the terminal rate from 3.75% to 4.00% in early 2023.

I think those expectations are far too hawkish. On the question of what the Fed will do this month, just remember that the Fed is a bureaucracy and an institution. It is not a trader sitting in front of multiple screens that trades the market and it does not rotate policy based on a single data point. A 50 basis point increase is much more likely, although 75 basis point hikes are plausible this year.

On the other hand, the terminal rate of nearly 4% may be too aggressive with the level of the two-year Treasury yield at 3.3%. In the past, the two-year yield has been used as an alternative estimate of the Fed Funds terminal rate. Indeed, the market is discounting a fed funds rate of 3.75% to 4.00% next year and 3.3% in 2024, indicating Fed easing and therefore a recession.

Cam Hui writes the investment blog Humble Student of the Markets, where this article first appeared. He is a former equity portfolio manager and sell-side analyst.

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Opinion: ‘The sellout panic’ has taken over the stock, bond and crypto markets – and this may be the beginning of the end – CNET


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