US stocks are down, but charts show market can calm down

What goes up must come down, and what goes up must go down. Conventional wisdom is that a little market craziness is inevitable, cyclical, and should give investors a potential buying opportunity.

But unfortunately this slowdown doesn’t seem to be the devil we know.

Markets are facing inflation rates at 40-year highs, Russia’s invasion of Ukraine, supply chain kinks and food shortages, rising interest rates, widespread recession forecasts, and former Federal Reserve leaders. American) openly questioning the actions of the current regime.

Even investors themselves are different. Covid-19-era stimulus checks, high unemployment and trading platforms aimed at younger generations have introduced a new group of promising traders to the markets.

About 20 million people started investing in the last two years. A 2021 survey by Schwab found that 15% of all US stock market investors said they started investing in 2020.

These market participants have never experienced a period of high inflation and high interest rates, and the sudden change in the economic environment is adding to the market turmoil, said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management.

“What we are seeing is an elimination of investors who were full of liquidity. They bought first and asked questions with meme stocks, SPACs, NFTs, there was a lot of what I call indiscriminate buying. And now we are seeing indiscriminate selling,” she said.

Most investors are not prepared for this trading environment, Joshua Brown, co-founder and CEO of Ritholtz Wealth Management, said in a recent blog post. “This is one of the most treacherous environments I’ve ever seen, and I traded during the dot-com crash, 9/11, Enron and Tyco and WorldCom and Lehman,” and a host of other crises.

As Berkshire Hathaway’s Charlie Munger said during the company’s recent shareholder meeting, the stock market has become “almost a speculative craze.” He added that “we have people who know nothing about stocks being advised by brokers who know even less.”

Still, while markets flirt with bearish territory — when a major index drops 20% or more from a recent high — some technical analysts don’t think there’s much to worry about. These three charts show why it might not be time to hit the panic button. At least not yet.

Bull markets return more than bear markets lose

The 14 bull markets since 1932 have returned an average of 175%, while the 14 bull markets since 1929 have resulted in an average loss of 39%, according to data from S&P Dow Jones Indices.

Downturns are also much shorter than bull markets: Since 1932, bear markets have occurred, on average, every 56 months, or about four and a half years, according to the S&P.

But they also last about a year on average, making them much shorter than the corresponding high-speed runs.

If we avoid a recession, said Liz Young, SoFi’s head of investment strategy, there could be a big recovery. In periods since the 1970s, when the S&P 500 dropped more than 10% without a recession, stocks rallied within weeks of the crash.

Markets today are trading as if they were already pricing in a recession – so if the Federal Reserve can orchestrate a soft landing, the returns could be significant.

Dropping moments are not a terrible entry point

The S&P 500 and Nasdaq Composite entered their seventh week of sustained losses on Friday. This is the longest consecutive period of market turmoil since 2001 and 2002 for the S&P and Nasdaq, respectively.

But past returns do not predict future performance, and recoveries from long losing streaks on the S&P are generally positive. When looking at past 6-week losing streaks, there was an average return of over 10% after one year.

“Now might be a good time to make a short-term bet on the market,” wrote Rocky White, senior quantitative analyst at Schaeffer’s Investment Services, who noted that in the four weeks after a losing streak, the S&P gained 1.57% in average, outperforming the typical return of 0.67%.

“When you go out for a year, there’s not much difference in returns, so long-term investors have no reason to panic,” White added.

Volatility is not noticeable

At this point, we may be approaching a bear market, but we are not panicking. Even as the S&P 500 has dropped nearly 20% from its highs, volatility remains below its May peak.

“When you look at the volatility index [VIX] from a historical perspective, it’s not as high as you might expect given the amount of uncertainty we have right now,” said Howard Silverblatt, senior index analyst at S&P Dow Jones.

Indexes

The volatility index, which is widely known as Wall Street’s fear gauge, is much lower than during the two previous recessions. “We are seeing a better mix of bulls and bears than we have seen in the past,” said Silverblatt, a good sign that the market is looking to find its support level.

What markets are now experiencing is a kind of continuous capitulation, said BNY Mellon’s Grohowski.

“If you’re lucky enough to have any money to invest,” Grohowski said, “I think waiting for the magical day of capitulation might be a missed opportunity.”