The steep declines on Wednesday morning sent mixed signals
regarding a market bottom. Several technical indicators - the number
of stocks hitting new lows, for example - pointed to a market
recovery coming soon.
But negative factors remain. The outlook for U.S. corporate earnings
continues to worsen, and worries about further declines from softer
Chinese demand and weak oil prices persist. The S&P 500 could fall
another 8 percent before earning a "bear market" title and some
market investors still want to see more blood before they buy.
TECHNICALLY, A BUYING OPPORTUNITY
On Wednesday there were 1,410 new 52-week lows on the New York Stock
Exchange, the most for any day since November 2008. Historical
market action shows that after days of such broad selling, buyers
may be tempted to step in to take advantage of the low prices.
The previous five times in which more than 1,000 NYSE issues were at
a year low, the average gain on the S&P 500 after one month was near
12 percent, a clear sign that buyers were enticed by the bargain
share prices. If the pattern repeats itself, that average gain from
Wednesday's low would take the S&P 500 above 2,000 by late February.
However, some traders are still keeping an eye out for a
"capitulation-type" session, in which negative volume overwhelms
positive and an almost irrational sense of despair takes over the
market. The fears which typically accompany a market bottom have not
been seen yet.
"I don't think we've hit capitulation yet. It certainly has been
ugly but in order for there to really be a bottom, it's got to be
one of those days where it gets so ugly it's almost panicky," said
Ken Polcari, director of the NYSE floor division at O’Neil
Securities in New York.
Technical analysts like Andrew Adams at Raymond James just think
more selling needs to happen. "While we do not anticipate another
major market collapse like we have seen in the past 15 years," he
said in a note, "it does make sense to be cautious at these levels
because the market is throwing up red flags by breaking through its
On Wednesday, the S&P 500 closed at its lowest since October 2014
after touching its weakest level in almost two years. However some
expect the index to fall even further before the downward trend can
reverse. The S&P 500 ended just below 1,860, down 9 percent for the
year and 12.7 percent from its record high. To confirm that it is a
bona fide bear market, it would have to fall 8.3 percent further to
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The next support level, according to various technical analysts, is
between 1,750 and 1,770.
Others analysts expect to see declines until the best performers of
2015, including Amazon, Netflix, Activision Blizzard, Nvidia and
Cablevision, fall further.
So far in 2016 those five stocks have fallen 13.5 percent after more
than doubling in price as a group last year. This leaves plenty room
for investors to sell and still come out winning.
FED TO THE RESCUE?
Federal Reserve policy makers have consistently said they are not
targeting stock prices when dictating monetary policy, but they have
bolstered markets for much of the last seven years by keeping
interest rates low and injecting cash through asset purchases.
The Fed has hinted that it expects to raise U.S. interest rates four
times in 2016 after doing it in December for the first time in
almost a decade. Its policy setting committee meets next week for
the first time this year and the follow up statement, expected on
Jan. 27, will be combed for a more dovish stance, enticing the bulls
back into stocks.
"To the extent that they (the Fed) back off their rate increase
trajectory, it's going to provide perhaps an inflection point in the
market," said Bucky Hellwig, senior vice president at BB&T Wealth
Management in Birmingham.
(Reporting by Rodrigo Campos, additional reporting by Caroline
Valetkevitch; editing by Linda Stern and Diane Craft)
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