Weekly Update: June 13: Was that the low? Hint: Maybe Not. Click here to find out

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By Debra Taylor, CPA/PFS, JD, CDFA™

 

Dear Friends,
Stocks rallied hard the week of May 31st, as the S&P 500 Index broke a seven-week losing streak in resounding fashion. That strong week was followed by last week’s losses, creating a see-saw effect that has everyone wondering, Is this the low? Today we will take a look at why the technical picture suggests volatility is likely to remain elevated in the near term and the market bottom is not here yet. However, we do remain optimistic for the medium and long term.
First, let’s take a look at the technical set-up of the S&P 500. Stocks are flirting with their recent low of 3800, as the Index is testing support. In other words, due to much uncertainty, it is hard for stocks to break higher and they could go lower.

Second, we remain skeptical that this market has truly bottomed without the capitulation usually found at major market lows. Nothing in markets has to happen, but whether it is put/call ratios, a stubbornly low VIX (a measure of implied market volatility based on options prices), or even just the fact that several of the nongrowth sectors arguably remain rangebound from 2021 and haven’t corrected, it would be highly unusual for us to see such a major market low without genuine signs of investor panic and indiscriminate selling. Of the five major signs of panic that LPL tracks and are often found at major market bottoms, only one has been triggered so far this year in contrast to a minimum of 3 that have been found at recent lows in March 2020, the fall of 2015, late 2011 and the Great Financial Crisis in 2008-2009.
Finally, while the market is inching closer, it remains in the seasonally weak part of the year and a May or June low would still be on the early side of the average low in a midterm year. Looking at all the midterm years going back to 1950, only two have seen their yearly low before May 19, when the S&P 500 made its closing low three weeks ago. We would note though, that the depth of this correction is almost exactly in line with the average mid-term year pullback. And regardless of when we make that bottom, as the chart below shows, the gains a year after the low have been substantial with a more than 30% average return and only one occurrence falling short of a double-digit gain.
In short, until we get inflation under control and the market sees some clarity from the Federal Reserve, we may be churning along for a while, possibly until the end of the year. Please reach out with any questions.
Debbie
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