I cannot tell you how often I hear how oversold the stock market is.
I don’t disagree, but the real question is whether there has been enough of a capitulation to boldly declare an interim “bottom" is in.
We did some analysis, looking at the five previous corrections this cycle, and the answer is no. We aren’t there yet. So stop asking and behaving like children in the backseat of the car.
First off, at the correction lows, the forward price-to-earnings multiple is, on average, 13.5 times, and the decline from the high is 2.4 percentage points. This time around, the P/E on this basis is 15.1 times and down 1.8 points. What does this mean, in terms of the S&P 500? It means that achieving a normal P/E compression on a forward basis would lop an additional 100 points off the index. And if we bottom at that 13.5-times average level, that would imply a bigger move down – by nearly 300 points.
If we look at the trailing P/E multiple, it’s much the same. It usually troughs at 16.2 times and currently is 18.8 times. And it usually compresses by a full three points but so far is down 2.7 points. So the rupture has been intense, but still not yet the average of the other five corrective phases during this decade-long cycle.
And what about the VIX? On average, at correction lows, the CBOE Volatility Index jumps nearly 160 per cent to 35, and so far the run-up has been 107 per cent to 24.5. No full capitulation here, either.
The Market Vane Bullish Consensus Stock Index, another go-to indicator in times like these, slides 17 points to 48 in a typical correction this cycle. But so far this time, the decline has been limited to just a seven-point dip to 55 – fully seven points above the typical stressed-out low.
In terms of breadth, you know the market is really washed out when just 27 per cent of the S&P 500 is above its 200-day moving average. The number now is 34 per cent, so not quite there but definitely getting closer.
Moreover, in the full-blown corrections we have seen this cycle, the flight to safety is so acute that the yield on the 10-year U.S. Treasury note, from start to finish, has plunged, on average, about 60 basis points by the time the stock market has reached bottom. In this current drawdown, the 10-year yield is actually a little higher than it was a month ago when the equity market rolled off the peak.
And think of it this way – at the stock market trough, the 10-year Treasury note yield is down to 2.3 per cent and the forward P/E multiple is 13.5 times, which translates into a 7.5-per-cent earnings yield. That is an average yield gap between the S&P 500 earnings yield and the 10-year Treasury yield of about 500 basis points at those other lows. Today that gap is only 350 basis points – again, another yardstick is telling us that despite what damage has already been done, only a fool would say we’ve hit rock bottom.
Finally, how strange would it be to see a trough at a time when the net speculative position on the CME is now long 220,941 E-mini S&P 500 contracts? When the correction started at the end of September, those net longs were 134,632 contracts – for a net change of 86,309 positions. At the other market lows this cycle, the speculators in the futures and options pits had sold off their positions by 25,178 contracts (as opposed to accumulating, as they did this time, as they bought the dip). And by the time the lows were in, they had swung to a net short position of 45,016 S&P 500 contracts. Compare that with today’s anti-capitulation level of speculators being net long 220,941 contracts.
Oversold, yes. But is this a market bottom? We’re not quite there yet.