Bear Attack Finale on Stock Market Begins

The infrangible spirit of 2021’s unstoppable Bull market in stocks has morphed into a climactic chorus of growls from a near record number of Bears. Companies with rapidly growing earnings, beating market expectations, are being summarily drawn and quartered for the high treason of making profits in a Bear market. The downside valuation compression risk we worried about with our March projections under 4000 on the SP 500 Index (down 15 to 20%) appear to be on the cusp of manifesting. The good news amidst this Wall Street Blood Bath is that investor sentiment is now extremely negative and the clock is running out for Bears to complete their attack before their pack is exhausted. As contrary opinion theory has proven in the past, major stock market lows occur when negative sentiment reaches an extreme. Option traders are buying Bearish bets on Put options at the highest ratio in two years. The AAII small investor sentiment measure of Bears expecting lower prices just reached the highest level since “the” stock market bottom in early March 2009. This extreme level is likely to be repeated or even exceeded when the delayed weekly numbers are released May 5th.

Our proprietary sentiment and momentum indices are echoing the same type of panic as the AAII sentiment index illustrates. Even though this market is vulnerable to further downside later this summer or a more protracted malaise, our timing indicators favor a climax low early this week. This short-term low would coincide with the Fed meeting May 3rd. Everyone expects a 50-basis point hike in the fed funds rate at this FOMC announcement, so the only modest surprise from Fed Chair Powell might be confirmation of continued double or triple rate hikes at ensuing meetings in June and beyond. Investors should use a capitulation in prices early this week to add stocks if the SP 500 Index dips below 4,000 or enters our labeled support zones below, at any time this quarter.

 

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