Stock Market Update: Delta Variant Sell-off. Is it time to buy yet?

Hi folks, just when the world has started to forget about me, a panic sell-off occurs and then people remember I exist.

Whenever I see an extended sell-off in the market, I look at it like a "Bat-signal". But, instead of a mega wealthy technocrat that likes to dress as a bat-ninja, you get me instead. Don't be too disappointed, ok?

I don't look too shabby.

All I need is to be more handsome, more rich, more able to kickbutt but cannot see under the hood of the stockmarket and I would be Bruce Wayne.

Ok.

In all seriousness, here goes.

Let's start with what everyone knows first.

The Obvious Short-term Technicals:

Good: we got a proper retracement into the 50DMA. The RSI is short-term OVERSOLD if we are still in a bullmarket regime. However, we are not oversold if we are destined to a longer retracement.

THings that make you go hmmm? The daily MACD cut downward so some traders will not go long until it turns upward.

The Less Obvious look UNDER the hood of the technicals:

Sentiment / Relative Value Levels give us an extra dimension on whether the market is "oversold" or not, relative to the behavior of the market in the past.

For economically sensitive stocks like the Russell, we are halfway in relative cheapness vs SPX (IWM:$SPX) compared to last flush out in Nov 2020. Also, VIX, SPXA50R not as extreme yet. $NYMO at extreme. Almost there for short term flush out if things were "regular".

What we can take away here: If this is a COVID surge sell-off like last year, we are not at extreme oversold yet. But, if this is a regular sell-off, it is quite oversold. I think this sell-off is somewhere in between. Since the news is focused on rising cases of delta variant, my guess is that this is a COVID surge sell-off, but I don't think the magnitude of fear will be as much as last year.

Here is a zoomed out look at those same indicators for the last 5-years.

Take Aways:

Some breadth indicators are at short term extremes, others not quite.

The VIX is higher than normal and is high enough for a normal sell-down, but not as extreme as the last COVID surge scare.

Now, let's go even deeper into this less obvious look!

LET’S TAKE A STATISTICAL LOOK at past market behaviors when these breadth indicators behave this way.

The less obvious, less obvious look under the hood of the stockmarket.

Statistically, the sort of breadth behavor has lead to consistent weakness over the next 2-4 weeks.

By consistent weakness, it doesn't mean that the market will plunge into the Abyss, it can also mean going flat, slightly down or slightly up. But, mostly flat, slightly down.

If the markets are flat, or downish, that's not such a bad thing...

We can a look at what the smart and dumb money are doing to get a sense of the type of "value" and superior entry point we might get.

Smart and Dumb Money

The close you enter into the broad markets when dumb money is a the bottom extreme, the better (usually). Who knows how reddit and how some sophisticated retail investors have changed the future behavior of this indicator. But, this is still a reasonable guide.

Smart money has been trickling in in this sell off, and now both smart and dumb money are in neutral positions.

Sentitrader.com has calculated that this suggests an excess return of 0.4% over the next 2 months.

In terms of statistical gains over historical market cycles, it's not "cheap" or "expensive" now. It's a small bargain now, not a big bargain, based on "smart money."

What does Tom Lee, Market Strategist of Fund Strat think? Pretty much close to what we think.

Check out this headline today.

Tom points out a couple points:

- COVID-19 cases are surging

- Delta variant raising concerns virus is evading vaccines

- But our data suggests that COVID-19 might actually be "seasonal"

- if so, equity markets bottomed 20 days before "cases peaked" in 2020 Wave 2

- In 2021, cases are surging now and stocks will bottom 3 weeks before cases peak

Tom thinks the economic conditions are ripe for a good 2H21, but acknowledges that stocks will be weak until there is clarity of when the delta variant will stop surging. However, the markets don't reverse when the cases peak, it reverses 20 days before the cases peak. So, when will this happen?

CONCLUSIONS:

Short term" support on 50 DMA.
Breadth / Relative Value indicators are oversold for a normal pullback, but not quite for a COVID case surge pullback.
Statistically, this breadth behavor has led to consistent weakness over the next 2-4 weeks.
Historical trends show that markets hit a tactical bottom about 20 days before the cases peak. Tom Lee's "take with a pinch of salt guess" are that there could be a tactical bottom in 9 days. (2 trading weeks)
Conservative Investors can be a little patient before going long. Wait either for the VIX or Sm/Dm to go into bigger extremes to get a bigger discount... OR, wait until the momentum turns up.
Agressive Traders can selectively play buying and selling massively oversold individual stocks that capitulated. However, might have to sell for short term gains because it might take 2-4 weeks before the market can properly "take off". Some stocks might have already seen / are close to their short-term bottom.
Extra Tip: for long term investors, in a shaky environment, look for stocks that have predictable cashflow, management has guided positively, manageable debt, good valuation that are free for fianncial maneuverability - they can increase dividend or do share buybacks.

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