US stocks set for a come­back, or an­other blow?

The Pak Banker - - MARKETS/SPORTS -

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.

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.

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