Following this week's selloff, one bear believes the stock market just showed a ‘buy’ signal. Others also see signs of a bounce.
The stock market has been brutally battered this week. The S&P 500 plunged by over 10% in five trading days before bulls showed up to stop the bleeding. On top of that, the severe correction wiped out over five months of gains in just seven days of trading.
It’s no wonder that investor sentiment dropped to an “extreme fear” level of 10 from a “greed” reading of 72 a month ago.
There’s so much “blood on the streets” that even the biggest bears are betting the S&P 500 will bounce soon. One, in particular, predicts that the index will trade higher in the next month.
When the stock market plunges at an unprecedented rate, it feels as if the nightmare will never be over.
David Rosenberg, chief economist and strategist of Rosenberg Research Associates Inc., believes that the S&P 500 will rebound soon.
The analyst and notorious perma bear took to Twitter to reveal an interesting correlation and ‘buy’ signal. He wrote,
whenever the VIX hits 40, the S&P 500 is higher a month later.
Investors rely on the VIX or the volatility index to assess the level of risk and fear in the stock market. The higher the VIX, the greater the fear of market participants and the higher the volatility.
The last time the VIX hit 40 was in February 2018 when the S&P 500 was trading at a low of 2,532.7. A month after that, the index climbed as high as 2,801.9 for a quick 10% gain.
A pseudonymous user named JoeCoolTrader tracked the VIX levels since and overlaid it with the chart of the S&P 500. The analyst discovered that when VIX spiked to 49 or higher, it often led to a bounce the following week.
Rosenberg isn’t alone in his view that now may be a good time to scale into the stock market. Thomas Thornton of Hedge Fund Telemetry strongly believes that we should see a bounce next week. He told CCN.com,
Seven days down giving back five months of gains is extraordinary and market sentiment has moved down to extreme low levels. We should see a bounce next week.
Nevertheless, Thornton doesn’t see the market resuming the uptrend anytime soon.
I’m still bearish. A lower high bounce is what I expect.
Mark Newton, founder of Newton Advisors, thinks that the S&P 500 is in the process of carving a bottom. The technical analyst wrote,
Hammer patterns after consecutive down days are part of the bottoming ‘process’.
Jason Harris of StockHunterTrading.com is also seeing the same patterns that indicate a bounce. He told CCN.com,
The setup is there for this to bounce. New month, biggest drop highs in history as well as the way they defended 2880 all day on SPX. You can also see here the technical setup of a daily hammer candle which usually signifies the start of a reversal or short term bounce.
It appears that the S&P 500 may be flashing a ‘buy’ signal after a long and exhaustive week. Even perma bears change their stance in these kinds of scenarios.
The above should not be considered trading advice from CCN.com. The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Sam Bourgi.