U.S. stocks set for a comeback, or another blow?

[January 21, 2016]  By Rodrigo Campos

NEW YORK (Reuters) - The deep selling that has been synonymous with Wall Street in the new year became bad enough on Wednesday to start drawing in buyers, but it is still too soon to tell whether they will look brilliant or battered in the weeks ahead.

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 critical support."

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 near 1,704.

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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