Financial Industry Insights from Advisors Asset Management


AAM Viewpoints — Technical Earmarks of a Market Bottom

Over the last several decades, market declines of 20% or greater have required many months of repair. For instance, the base-forming process that began in October 2002 amid the technology bubble-triggered bear market, extended about six months. The same was generally true following the financial crisis in 2008. Additionally, it took about seven months for the DJIA (Dow Jones Industrial Average) to rebound into record-high territory after the market was broadsided by the COVID-19 outbreak in March 2020.

By the end of April this year, bearish consensus had soared to its highest levels since the financial crisis — one of the worst bear markets in decades. Subsequently, some of the most dramatic price swings thus far in 2022 occurred during May producing two 1,000-point-plus routs and 10 triple-digit daily changes in the DJIA. Yet, despite these expansive trading movements, the CBOE Volatility Index (VIX) embarked on a steady downtrend through the period. The persistent decline in the VIX — often dubbed the “fear index” — signaled that pessimistic psychology might be shifting toward a more neutral or even positive bent. Grizzly price patterns that had persisted for five months seemed to be ebbing and net money flow trends indicated subtle but more steady buying as the S&P 500 price-to-earnings multiple receded toward historically nominal levels. Nonetheless, absent a bullish catalyst accompanying the braking bearish momentum, the nascent bottoming action seemed at first more like seller exhaustion than enthusiastic buying. As with other important market turns, the most significant technical clues were derived from the bottom-up assessment of its underlying conditions, including the actions of the long-term sector and thematic leaders.

It is my contention that many of the same technical characteristics that beckoned a change in investor attitude at historically crucial and pivotal times in the past were in early bloom this past May. The month may have served as a buffer stage that soon after established the consequential lows in June. I believe the same general timeline for base development which played out following past significant declines could apply here as well. Starting the clock on May 2, the bottoming process might extend into early November, coincidentally in tandem with the midterm elections. This would seem to have added merit since there is a possibility that Republicans will win back the House and Senate. Historically, the market does well amid policy gridlocks. In the interim, I anticipate an unsettled market that tracks in a restricted range defined by widely watched technical levels including the 50-day and 200-day moving averages. This limiting technical fencing in the short term could present stock-picking opportunities representing both growth and value themes.


CRN: 2022-0901-10315 R

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