6-22-22: What Capitulation Looks Like

by Jason Bodner

June 22, 2022

Everyone seems miserable this year. The news is constantly terrible. Inflation is getting Americans “really, really down,” in the words of President Joe Biden.

Maybe we all just have a collective case of Cherophobia – the fancy name for “fear of being happy.”

And just when things started to look up, down we went again.

I reported some good news here recently… the Big Money Index went oversold on May 24^th. In the past 32 years, whenever that happens, it means that stocks are grossly oversold and will likely rally thereafter. And like clockwork, the S&P 500 rallied almost 10% (+9.8%) from it’s low. Buying started sneaking back into the system and things felt like they might stabilize. But then everything changed…

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Last week, selling began again as bad economic data just kept on coming. A dismal CPI inflation report set off the selling. Then the PPI report generated more selling. After the Fed generated a bounce, selling got downright violent on Thursday as Switzerland surprisingly raised their rate 50 basis points and the UK raised rates a fifth consecutive time. Inflation fears have become a foregone conclusion now.

But there might be a silver lining… Stocks are now getting ridiculously oversold. The selling we saw last week is starting to look a lot like capitulation. Recent market selling has been more rotational in nature. For instance, as technology shares were sold, energy was bought, or financials were bought as industrials were sold. The market was like a washing machine with money sloshing all over the place.

But selling last week saw everything sold. In fact, on Thursday June 16^th, there were only two buy signals vs. 539 sells. You can see here how blue buying was just absent the past couple of sessions:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

When we look below the surface at the sectors, we see investors throwing in the towel. All 11 sectors saw chunky selling. That includes the market’s brightest spot since the beginning of the year, namely energy.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

That’s what capitulation looks like – when everything is sold at once, in concert, in a big way.

In addition, ETF selling was downright nasty last week. In fact, Monday saw the single biggest day of ETF selling ever. Yes, that includes the pandemic, the Great Financial Crisis, and everything else.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

ETFs getting whacked is yet another clear indication of capitulation. There was high volume selling in all areas of the equity market. That’s the bad news. The good news is that historically when we see such comprehensive selling like this, things begin to move up. Here, I took all days of 100 or more ETFs being sold going all the way back to 1990. The forward returns are great:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

That’s 18% gains from the lows after six months, +31% after a year, and +50% after two years on average.

I know what you’re going to say: “This time it’s different.” While it’s true that each event is unique and there is much uncertainty over future conditions, the language used by Fed Chair Powell on Wednesday was encouraging for a few reasons. He acknowledged that price stability and 2% inflation is the core goal. He also telegraphed that a recession is not necessarily a forgone conclusion at this point. He also made it clear that the Fed is committed to getting this extraordinary circumstance under control.

President Biden echoed Powell in saying that, despite negative sentiment, that doesn’t mean that there will necessarily be a recession. Adding more optimism to this is JP Morgan’s Chief of Macroeconomic research reiterating his stance of no recession for this year and the S&P 500 at 4,900 by year end.

So, not everyone is bearish. And as equities get continually sold, we grow ever closer to a bottom.

Naturally, these are difficult times. Uncertainty is the hobgoblin of markets. There is much uncertainty now. But as froth and leverage get cleaned out of the system, the market has firmer footing upon which to build a base. At the beginning of the year, speculative asset bubbles popped. That paved the way for margin debt balloons to be deflated. Now we face uncertainty over mortgages as credit is freezing up in that market. The fact remains, once there is an indication of some clarity, markets will respond positively.

While the sentiment is in the basement, I look for positives. There are several. Capitulation usually comes when sentiment is lowest. The consumer confidence report was the lowest in decades. ETFs saw the most selling ever. All sectors got smoked. It looks a lot like capitulation, which is good for future prices.

When we see indications that inflation is starting to cool, the markets will calm down. In the meantime, in yet another glimmer of hope buried under the sea of bad news, Yardeni Research released a positive report. Yardeni Research showed how the S&P 500 consensus revenues estimates for 2022 and 2023 are still at record highs. The same goes for earnings forecasts for 2022, 2023. Profit margin estimates are edging down for 2022 and 2023, but forward profit margins rose to a record high last week. Good news!

Joyce Meyer said it best: “You cannot have a positive life and a negative mind.”

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Jason Bodner is a co-founder and co-owner of Mapsignals. Mr. Bodner is an independent contractor who is occasionally hired by Navellier & Associates to write an article and or provide opinions for possible use in articles that appear in Navellier & Associates weekly Market Mail. Mr. Bodner is not employed or affiliated with Louis Navellier, Navellier & Associates, Inc., or any other Navellier owned entity. The opinions and statements made here are those of Mr. Bodner and not necessarily those of any other persons or entities. This is not an endorsement, or solicitation or testimonial or investment advice regarding the BMI Index or any statements or recommendations or analysis in the article or the BMI Index or Mapsignals or its products or strategies.

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