Stocks ‘Nowhere Near The Bottom’ With Panic Absent

“We’re nowhere near the bottom,” someone quoted by a mainstream financial media outlet said Friday, as US equities struggled through the final session of another difficult week.

I can’t find the quote, or I’d attribute it. I scrawled it on a legal pad I keep next to my keyboard. If that pad could talk, it’d tell you what I plan to publish over the next 48 hours, when I might finally add an autobiographical fiction section to the site, what kinds of cheese I need to restock and also some ideas about where I might opportunistically buy if the mini-crash I expect to see in the US real estate market ever materializes.

In any case, the media was full of “nowhere near the bottom” quotes as the S&P bounced around erratically on the way to a fifth consecutive weekly decline (figure below).

A handful of analysts and PMs were brave enough to suggest the worst may be over. This is, after all, the benchmark’s longest weekly losing streak since 2011. But by Friday afternoon, most were despondent. Some were apoplectic.

But apoplectic isn’t the same as panicked. Being angry and incredulous isn’t tantamount to being scared, and generally speaking, you need panic to set in before it’s possible to call a bottom.

For weeks, positioning was indicative of despondency, ostensibly setting the stage for a counter-trend rally. That hasn’t panned out, though. The rallies we’ve seen are really just squeezes. That makes them positioning-driven by definition, but manic, mechanical surges like that witnessed on Wednesday afternoon don’t really qualify as counter-trend rallies. They’re not even “dead cat bounces.” They’re just fleeting fireworks shows triggered by the interplay of options hedging and modern market structure.

BofA’s Bull & Bear Indicator sat at 2.1 as of Thursday, as close as it gets to a contrarian “buy” signal without actually triggering the “rule.” But the bank’s Michael Hartnett doesn’t think now’s a good time to be a hero.

“Yes, all are bearish, but [it’s] paralysis rather than panic,” he said, noting that for every $100 put into equities over the past 14 months, just $3 has been redeemed. You can get a sense of that by looking at a longer history of EPFR global equity fund flows data.

Note in the figure (above) that recent outflows are trivial compared to the deluge witnessed across what was an anomalous year for inflows.

Additionally, more than $1 trillion of inflows to stocks since the beginning of 2021 is just barely under water — the average entry point was SPX 4,274 according to Hartnett. I’d remind folks that the best way to read Hartnett is to understand his goal. He seeks to communicate key concepts and trends, and to capture the prevailing zeitgeist. Quibbling over the creative way in which he sometimes interprets and presents the data misses the point.

The table (below) shows that out of 19 bear markets going back nearly a century and a half, the average drawdown was more than 37%.

“Past performance is no guide to future performance, but if it were, today’s bear market ends on October 19, with the S&P 500 at 3,000 and the Nasdaq at 10,000,” Hartnett said.

So, coming full circle, “we’re nowhere near the bottom.” Or at least not if past is precedent.

It’s not all bad news, though. As Hartnett went on to note, “bear markets are quicker than bull markets.”