S&P500: Almost at bottom?

Below is the Four Quadrants by Louis-Vincent Gave.

Most people, and especially mainstream, believes we have been in Inflationary Bust phase, where we have prolonged inflation into a deduction in economic activity. Also a full blown recession is not yet obvious, there is the fear that the FED will continue tightening into one.

That's the reason why there has been indiscriminate selling in the past couple weeks.

More interesting to be is that the FED is also doing Quantitative Tightening, in which they are selling assets on their balance sheet instead of buying as they have done so since 2020.

With these factors in mind, the market should have downside bias, or, that stuff should be sold until strong evidence it should be bought.

However, the SPY has been sold down by about 20% or so.

In previous posts, the average selldown from peak to bottom for bear markets in a recession is about 30%. The average is about 20% for mild recessions.

The two things to think about is: 1) has the broad market overcorrected? And if so, when should there be a countertrend rally? 2) We believe large cap stocks are not at severe recession prices yet, but a some stocks (especially small cap) might have already capitulated to severe recession prices.

The below data is for those people who want to explore both questions.

Broadly speaking, the broad markets insider buying ratio is creeping higher and is already at a good level, but it's not at great levels that usually occur towards the bottom of major crashes or major corrections.

The smart money / dumb money corroborates the same. The spread between smart and dumb money are at good levels, but not great levels.

The markets seem to be waiting for a final flush out. If there is another leg down in the market, or some form of capitulation, it is likely that it will push both the insider buying levels and SM/DM spread to major correction extremes, and will likely be a great time average into a potential intermediate to long term bottom.

However, it is worth noting that some sectors or stocks have already capitulated and have a strong buy up.

Remember that the narrative for the last month was all the damage high interest rates would cause. Because of that, mortage REITs were rightfully sold off because conventional knowledge says that mortage assets drop in book value on higher interest rates. Those stocks capitulated, and got bought up on the back of insider buying at the crash lows.

The bottom at ~$5.56 was bought by NLY's CEO.

MREITs could be considered the canary in the coal mine, since it's sensitive to both interest rates and economic activity, so was the capitulation an overshoot to the downside?

We see the same for MAC, a heavily leveraged shopping REIT.

The capitulation below $10 was bought up by MAC insiders, will it also form a bottom like NLY?

I list NLY and MAC not to encourage you to buy them now. MREITs and highly leveraged shopping REITs are not everyone's cup of tea. I view them as speculative bottom trading plays. Many might trade them after they recover to reasonable levels, but not hold them long term. Or, some might add them to a diversifed portfolio. These are likely not the kind of stocks you want to hold big amounts for long term unless you understand what drives these stocks and what to expect from them.

However, I find them interesting because these are the stocks that should be affected by both high interest rates and recessions, and yet their insiders are buying. Is it a signal that the damage the economy the market is assuming has overshot reality at the moment?

Taking all these together, take a look at the S&P500 chart:

The picture looks too perfect that it makes me feel weird.

The SPX is so close to the RED line, that is statistically a great reversal support if not in a full blown recession. The last two times the price dropped right past the RED line is during the COVID crisis in 2020, and the start of the FPC in 2008.

Also, the weekly MACD line (black line) is attempting to flatten and turn up, which is the first sign of momentum change. It hasn't turned up yet, so it needs at least 1 to 2 weeks to show us it can. However, the gap between the red and black line is shrinking, which is a potential leading signal that momentum could be waning on the downside.

If prices do hit that RED line, it will highly likely that both insider buying will increase (it has been increasing the last couple weeks) and SM/DM spread to levels that make great intermediate buying opportunities. It's like getting dealt a pair of Aces in a texas holdem game. You might lose if unlucky, but it's in your favor to play it.

However, this scenario is too perfect.

And, if many people are expecting a reversal in end July or August, a bottom might start to form sooner...

Bottom Line:

1) Sentiment and Insider buying activity is getting good, but not at crash levels yet. In my experience, I would like to see more, especially in an environment of FED tightening, supply chain and economic uncertainty.

2) SPX is close to strong long-term support. It could get there because large caps are not crash cheap yet, but some small caps are.

3) MACD is at cycle low and is at nascent stage of turning up (not yet, but could be soon).

4) Some key stocks that are affected by interest rates have capitulated and bought up by insiders, which is what you should see if the markets are going to find a bottom soon.

5) So, in terms of long-term investors, it might be prudent to wait for either further downside and the sentiment statistics are at crash levels; OR, if there is no capitulation, then at least a bottom to form to force the weekly MACD higher. Before either of these happen, stocks that you have deemed good stocks and undervalued can be nibbled at since prices are "good" just not "great" in terms of the measures talked above.

6) But, at these already high levels of sell downs, looking for stocks that have capitulated before the rest of the market does are likely good trading opportunities.

Stay safe everyone.

I'll be posting less frequently because I need to focus on other things, including health.