S&P 500 Bottoming Process In Progress; Buying Opportunities Ahead
Tiho Brkan | Aug 26, 2015 04:45AM ET
Earlier in the week we discussed the fact that US equities are currently going through a crash. The same is true for just about all global equity indices. The first two charts in this post show the panic selling we are currently experiencing. On Monday, the Volatility Index (VIX) spiked above 50 (second highest level in two and half decades) and the number of New York Stock Exchange 52 week lows jumped to 1342 issues (highest since 2011 Eurozone Recession).
Furthermore, earlier in the week, the VIX chart also showed that the spike was so surprising that it caught market participants completely off guard. The so-called fear gauge jumped 230% above its 200 day moving average, which is the second highest level on record for this index, just behind the numbers seen during the catastrophic 1987 market crash.
We have circled all the capitulations during the previous two decades in the chart below. In truth, whether the trend is bullish or bearish, VIX spikes almost always signal an intermediate degree bottom is at hand. In other words, 3 to 9 months out, stock markets usually rally strongly even if the rally ends up being a dead cat bounce.
h3 At its highest high, the VIX index spiked into the capitulation zone /h3With capitulation in progress, should we buy immediately? Definitely not. Prudent investors need to understand how previous panics have bottomed out. The chart below shows all the crash events and their bottoming process post the VIX spikes (includes all major sell-offs from 1987 until present). Let us make a few observations.
Firstly, it is important to note that 2001 sell-off was the only one to bottom on a V trough, while all others went through a double or a triple bottom. Furthermore, certain sell-off events were mild relative to some of the other crashes. Half of the sell-offs since teh 1980s were smaller than 20%, while the other half were larger. It is important to remember that smaller sell-offs usually occur during external events such as the Japanese Bust in 1990, Emerging Markets Crisis in 1998 and Eurozone Crisis in 2010/11. The current sell-off is sparked by Emerging Market recession and Chinese slowdown.
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We will continue to post this analogue in coming weeks as we track the bottoming process and the up-and-coming buying opportunity in stocks.
h3 As the VIX Index spikes, the bottoming process can take anywhere from 1 to 4 months/h3/h3
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