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AAM Viewpoints — The Onus Remains on the Bulls


 

Since late January, the stock market has produced several dramatic reversals that have seen big losses replaced by large gains in single sessions. When the first of these pivots unfolded January 24, it seemed to offer investors some hope that the early 2022 equity slide was ebbing. The market recovered temporarily but by late February the major stock averages were slumping once again. Subsequent expansive swings materialized that only presented temporary respites from unrelenting downward pressures. Heightened volatility continued through April presenting a seesaw pattern with a very restricted technical ceiling amid fleeting recoveries. Outwardly, the occasional market rebounds seemed to indicate underlying buying support but as these swings persisted, investor confidence was clearly undermined. The net impact has been soaring bearish psychology which has escalated to levels not seen in more than a dozen years.

Arguably, the market is severely oversold based on several technical measures. One of these is sentiment. In a recent weekly survey published the week ended April 27, the American Association of Individual Investors (AAII) reported bullish consensus fell to its lowest levels in years. At the same time, bearish sentiment surged to 59.4% — far above the previous week’s 43.9% finding. This level has not been seen since the financial crisis of 2008. Even though this data depicts an oversold market, a remaining concern is that stocks could stay under pressure for an extended period without the emergence of a positive catalyst that would cause bears to bolt.

Historically, the market stumbles amid uncertainty and there are many unresolved headline issues facing Wall Street. When technical rallies have materialized, they have acted only as “relief valves” that have prevented a more deeply oversold condition from developing. This has potentially extended the timetable for an ultimate and durable bottom. The rallies that have developed year-to-date have thus far proven to be transitory corrections within a gnarly downtrend. While there still may be too much complacency amid challenging market conditions, an encouraging sign is that the CBOE Volatility Index (VIX) has recently spiked to higher levels indicating the onset of heightened trepidation among traders.

While capitulation is not the only possible scenario for an end to the market’s weighty downturn this year, it is becoming more plausible that further surrender on the part of the bulls may be necessary to trigger broad-based bargain hunting. Nonetheless, based on current sentiment readings, the market may not be too far from a technical event that serves as a bell ringer for the bulls. In my view, this is a time to stay the course and not allow emotions to supersede rational investment decisions. As Sir John Templeton famously observed, bull markets are born amid pessimism.

CRN: 2022-0506-10021 R

The opinions and views of this commentary are that of Peroni Portfolio Advisors and are not necessarily that of Advisors Asset Management.


This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.

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