Short Term Bottom

I’m going to go out on a limb and say that this morning’s lows are going to form a short term bottom.  By short term I mean at least a week or two.

There are a lot of reasons to think this is the case.

First, we saw capitulation selling this morning along with a spike in the Volatility Index (VIX) to 37 – the same high it reached on August 16th.  This means people were scared and willing to pay up for puts.

Second, volume was extremely high today.  It was 2.6 billion on the NYSE and 3.1 billion on the Nasdaq.  Those are the kinds of levels we saw at the bottom in August and in mid-November for the Nasdaq when tech investors bailed on “lumpy” sales.

Many of the big, popular ETFs like the QQQQ, SPY, XLF, XHB and EEM had similary massive volume.

Third, intraday reversals of this kind have marked short term bottoms on Thursday August 16th and October 11th.

Fourth, stocks don’t just go straight down and we’ve now been down for pretty much three weeks straight (Wed 1/2 – Tue 1/22). 

Even when the Nasdaq was collapsing in March-April 2000 it managed to put in a solid two week rally from Monday April 17th through Monday May 1st after the three week collapse from Monday March 27 through Friday April 14th that took it down 33%.

Fifth, even if there is a recession it’s starting to be priced in.  The Nasdaq is 20% off its October 31st closing high and the S&P 16% off its October 9th closing highThe S&P Financials are down more than 30% from their highs in May.  Even in a recession and a bear market stocks don’t go to zero!  At some point, even if business is bad, there’s value.  We’re starting to see that.

Sixth, even if this isn’t the absolute bottom, which I don’t think it is, the market is not a monolith and not everybody shares the view that we’re headed for a nasty recession.  Some investors are bound to start seeing value and step in to buy at some point soon.

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