If I Throw a Rock Into This Market Pit, I Think I Hear It Hit Bottom

Last Friday, I wrote a column about

A week ago today, I was waiting for signs of market capitulation at the 3800 to 3850 level on the S&P 500, as I wrote last Friday. My trader instinct on Thursday detected a full capitulation after touching a low of 3858 – close enough to the target range.

What made Thursday’s market move a capitulation that sets up a reversal higher? We had a rare streak of six-consecutive down weeks and six-straight down days in the S&P. The morning gap-down became a final flush and was retested in an afternoon move when the market felt hopeless as every rally continued to be sold. The generals were shot: Apple (AAPL) and Microsoft (MSFT) were under pressure all day, far below recent trading ranges. However, former high flyers caught a short-covering bid, signaling washed-out levels after epic downdrafts.

In an intra-day note on Thursday, Morgan Stanley’s market strategist, Mike Wilson, moved to a tactical buy on tech stocks due to the decline in interest rates. Wilson has been correctly bearish this year, with a target close to Thursday’s low. Softening commodity prices and lower interest rates could help spur optimism regarding peak inflation.

Market sentiment rarely gets as bearish – generally viewed as a contrarian indicator. Additionally, 92% of stocks in the Nasdaq-100 are trading below their 50-day-moving-average, an indication of extreme oversold readings and also near levels where past markets have bottomed. In such market conditions, most investors look to deploy cash into strength, only after they believe a bottom has been made. The further the market moves off the low, the more convincing the prospect that near-term lows have been established.

During the tech-led Nasdaq bear market in 2000, many opportunities arose to capitalize on moments of extreme stock wreckage with buyable bottoms. I reminded my Twitter followers (@polar_cap) of this on Wednesday night in anticipation of Thursday’s capitulation low.

Could I be wrong about the capitulation low? Indeed, if the market breaks Thursday’s low quickly, it’s fair to assume this bottoming process will take more work.

The market has been a sell on any strength most of the year. I think a strong trading rally is coming, where it’s more of a buy-the-dip market in upcoming weeks. A reasonable target is a move on the S&P to the 4100 to 4200 range, former market support.

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