Stock market liquidation? Why it has to get “hot” before it burns out

The sharp reversal in US stock markets this week may have shaken investors, but a phase of liquidation that may finally be underway likely needs to “heat up” before it burns out, a top Wall Street chart-watcher warned on Friday.

What’s notable about the market’s wild two-day swing on Wednesday and Thursday is that market internals — indicators that measure things related to the number of rising stocks in an index versus falling stocks — also swept through, although they tend to be “less volatile.” ” to be. than prices, Jeff deGraaf, founder of Renaissance Macro Research, said in a statement Friday.

The Dow Jones Industrial Average DJIA,
plunged over 1,000 points, or 3.1%, on Thursday after rising more than 900 points on Wednesday, during the Nasdaq Composite COMP,
fell 5%, the worst daily performance for both indexes since 2020. The S&P 500 SPX,
fell 3.6% on Thursday. Stocks were down on Friday, but outside of session lows.

There were strong internals this week as stocks surged after Wednesday’s Fed meeting, while Thursday’s sell-off was accompanied by one of the worst internals, with just 5% of the Russell 3000 RUA,
Stocks rose with an 8% increase in volume, he noted. (see graphic below).

DeGraaf noted that the back-to-back swings in internals this week are infrequent, with the last one occurring near stocks’ March 2020 COVID lows. In fact, investors have never had such a sharp swing in internals as seen Thursday before the 2008/09 financial crisis (see chart below).

Macro Research of the Renaissance

But before talk of the COVID bottom gets too excited for potential bulls, the analyst cautioned that the market could still have a long way to go before exhausting itself. Meanwhile, the S&P 500’s slide below Wednesday’s low turned a call for a rebound in stock markets into a “toast”.

“We get into a liquidation environment, and while these often burn themselves out, they get hotter before they do,” deGraaf said.

Market watchers, who doubt stocks are yet to bottom, have also noted the lack of a convincing rise in the Cboe Volatility Index VIX.
or VIX, an options-based measure of expected 30-day volatility in the S&P 500. Market bottoms often come as VIX, a proxy for trader jitter, spikes, but the index’s rise this week has been relatively muted.

The VIX surpassed 35 in early action on Friday, ahead of its long-term sub-20 moving average, but failed to surpass last week’s high above 36, let alone March’s high above 37.

“This suggests that investors are expecting an even deeper sell-off in the coming months as the Fed is expected to hike rates another 50 basis points at the June meeting,” said Robert Schein, Chief Investment Officer at Blanke Schein Wealth Management in Palm Desert, California with approximately $500 million in assets under management.

“If investors really believed the bottom was near, we would likely see an even higher VIX,” he said in emailed comments. Stock market liquidation? Why it has to get “hot” before it burns out

Brian Lowry

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