Before You Jump Back into the Market, Consider These Statistics

Before You Jump Back into the Market, Consider These Statistics

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Finally, some good news.

After seven consecutive weeks of declines, the stock market broke its losing streak on Friday.

Although we don’t want to dampen the mood, traders still do appear to be split about whether we have hit the actual bottom. Translation: No one is quite sure what to think of this rally, which begs the questions… Are we going to start going up — and stay that way? Or is the worst, so to speak, yet to come?

Unfortunately, there’s no definitive answer for either. We can speculate all we want, but ultimately, we cannot see the future. The market is — as has been proven over the last few years — a beast whose moves cannot be strategically tracked. We can, and have been, be surprised.

Before we address those questions, let’s talk about something a term you’ve likely hard thrown around a lot in financial news and your newsletters: something called “capitulation.”

The bearish argument goes that a bottom isn’t reached until the bulls finally surrender. This idea comes from technical traders (who analyze charts over financial statements to make investing decisions) that look for the point of “maximum pessimism.”

That cheery-sounding state is reached right before the market rallies. So, if we can tell when traders have capitulated, we can identify the turning point in the market.

While that idea sounds easy on paper, like most vaguely defined market jargon, capitulation is only easy to see after the fact.

Unfortunately, there isn’t a group of traders everyone can point to as the last holdouts and say with full confidence that their demise will trigger a rally.

What most investors agree about is that capitulation — or the market’s turning point — usually happens with a big volume spike. (Volume tells us how many shares are traded per day.)

As you can imagine, if the last bulls finally give up, they will sell stock in a panic, and the number of shares traded that day will skyrocket.

The biggest down day we have had in the last month was on Thursday, May 5, when 13.6 billion shares were traded.

However, investors traded 19 billion shares on Mar. 20, 2020, when the market pivoted higher from the COVID-19 panic. Other such turning points in 2018, 2015, 2011, 2010, and 2009 had similar trading volume to the pivot in 2020. Therefore, many traders are holding out for a “true” capitulation before jumping back in.

Now, this situation reminds us of the adage, “There are lies, damned lies, and statistics.”

If we think about volume in terms of the total value of shares traded on the most recent down days in the market, then the selling on Friday, May 20, just before the rally was almost 20% above the “capitulation” of 2020.

That means traders were more active over the last two weeks than they were at the depths of the selling in 2020 or 2018!

Pundits in the financial press are arguing that the market can’t have hit a low yet because volume hasn’t truly spiked. But if we look at things from the perspective of value, then there has been more than enough selling (if such a thing can be defined) to clear out the weaker traders and provide a floor for the market.

The next concern, of course, is when to jump back into the market without any reservations…

If you did what we suggested last week and took some calculated risks in consumer staples and semiconductor stocks, it would have paid off big. We stand by those watchlist picks for this coming week as well.

However, staying diversified and focusing on large-cap value is going to remain important. Maybe the market is making a pivot right now, but there is some big news this week that could be a spoiler, so adding new positions on dips rather than buying the rallies makes sense.

  • Wednesday, Jun. 1

The Institute for Supply Management (ISM) will release its monthly manufacturing index, which has been in decline all year.

The measure popped up a little last month, but recent data from the manufacturing sector has been weak, so a negative surprise on Wednesday could spook traders into a profit-taking mode through the end of the week.

  • Friday, Jun. 3

The Bureau of Labor Statistics (BLS) will release the jobs and unemployment report for the month of May on Friday. This includes growth numbers as well as wage inflation. Most economists have downgraded their expectations for May’s report, so it’s going to be a low hurdle to jump over.

From our perspective, a positive surprise on Friday is a great buying opportunity before the weekend.

Bottom Line

After a great week in the market, traders are still split over whether there has been “enough” selling to clear the way for a rally.

We think the historical data shows there’s no reason that the market can’t continue higher from here, but either way, stocks will remain volatile.

Article printed from InvestorPlace Media,

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