how much pain is there still and how long will it take

With stocks, bonds, and crypto plummeting, inflation spiraling out of control, and months of Federal Reserve tightening to come, it’s starting to feel like anything that can go wrong in financial markets l ‘is. Panic is in the air.

For traders looking for a silver lining, that’s about as good as it gets.

The S&P 500 fell nearly 9% in three days, a murderous streak that left virtually nothing untouched, including energy stocks, the year’s best performing group.

Bond selling accelerated, with the yield on 10-year Treasury bills hitting their highest level since 2011 and two-year rates at their highest since the financial crisis.

The cost of protecting investment-grade debt from default has skyrocketed, and an ETF tracking this sector plunged to its lowest since March 2020.

Can it get worse? Yes. History is replete with examples of premature optimism. Funds turn out to be fake, data gets uglier, and things that seemed cheap turn out to be expensive a day later. For those who see seller burnout as a useful indicator, at least the process is underway.

It’s unclear how much time is left to go – although there are indicators that have helped in the past.

“It’s always difficult,” said Nancy Tengler, CEO and chief investment officer of Laffer Tengler Investments, of the distinction between the start of a selloff and the end of a selloff. “Usually you’re looking for panic selling, among other things,” she said.

“The question is how much more pain is there and how long is it going to take?”

Fanning the flames of recession, the consensus that soaring inflation will require a more aggressive response from the Fed to be brought under control, will in turn dampen US economic growth.

Money markets are now seeing the central bank’s terminal rate at 4% for the first time and expect it to get there by the middle of next year. Some pockets of the market see the Fed hitting big extremes this week, with some banks not ruling out a potential 100 basis point hike.

At 3,750, the S&P 500 is now trading at just over 15 times its estimated 2023 earnings, down from its valuation range over the past decade. In better times, this could engender confidence that an end was at hand for the sale.

With the emotions dominating the markets right now, there isn’t much to base a bullish deal on.

Strategists and chartists say they are looking for heavy volume, a spike in the Cboe’s volatility gauge, gap moves in stocks and an sell-off on behalf of the retail investor cohort.

Stocks will struggle to rebound without the VIX hitting 40, a level according to Evercore ISI strategist Julian Emanuel that will mark a “cathartic flush.” The volatility gauge rose above 34 on Monday.

Trading volumes on U.S. exchanges topped 15 billion shares on Monday, 3 billion more than the average so far this year.

JonesTrading’s Dave Lutz, meanwhile, maintains a “surrender list.” He’s starting to see more panic and is watching if the VIX hits 38, a level he hit in February.

The put/call ratio on the S&P 500 has approached its highs for the year, another sign that a possible bearish washout is near. On the other hand, a measure of the index’s relative strength sits at 32, above the level that would indicate an oversold condition.

Monday’s session also marked a “big downside” day of extreme magnitude, Lutz said. All but five stocks in the benchmark fell. Retail investors, meanwhile, are “starting to suffer enough injuries. They are definitely scared,” he said.

Selling at the start of the week was relentless. Energy, the best performing sector of the year, lost more than 5%, its worst session in more than a month.

All the nervousness over the Fed’s decisions has reignited recession warnings from economists who see the Fed raising rates at a pace that won’t allow the economy to escape a downturn. The Morgan Stanley CEO said he saw the risk of a US recession at around 50%.

“It will be a recession,” said Victoria Greene, chief investment officer at G Squared Private Wealth. “It’s funny that we still have recession deniers. I don’t see how it’s not going to lead to a recession just because of the drastic measures the Fed is going to have to take. »

This year’s bear market reached its designation faster than average. The S&P 500 typically takes 244 days to fall 20% from its peak, according to Bespoke Investment Group.

The current one only took 161 days. And in more than half of the 14 bear markets since World War II, the index has bottomed out within two months of crossing the 20% threshold.

Monday’s break below 3,850 for the S&P 500 could be just the start of an even more precipitous selloff that could take the index to 3,200, more than 30% below January highs, according to Lori Calvasina, head of US equity strategy at RBC Capital Markets.

That would be “consistent with the average peak-to-trough recession decline of the S&P 500 since the 1930s,” she wrote in a report.

Calvasina also notes that such a drop would be analogous to the Covid selloff at the start of 2020, “which makes us think that’s a reasonable starting point to think about how low the S&P 500 might be this time around. case of recession”.

Elsewhere, however, Saira Malik, CIO at Nuveen, sees opportunities in growth stocks. The cohort suffered losses through May that were five times larger than those suffered by its value peers.

Growth and technology price/earnings multiples look potentially more “inviting”, and while inflation moderation remains elusive, a plateau may soon be in sight. “The tough times for growth stocks continue, but we see some bright spots amid the gloom,” she wrote.

Still, while it may be true that traders want to see the VIX higher than it currently is before they can cry capitulation, it’s hard to come up with a clear definition of what a washout event, according to Art Hogan, chief market strategist at National Securities.

“The point of surrender, we’re probably closer to today than we were a month ago,” Hogan said in an interview. “But, unfortunately, in the real world, you can’t set strict guidelines on what panic selling and capitulation looks like.”

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