The equities market and stock exchange traded funds pared losses Monday after the Dow Jones Industrial Average opened 1,000 points lower, enticing some sideline investors to dip back in.
“This is very traditional trading pattern, especially when we’ve had a weekend like this to deal with,” Phil Blancato, chief executive of Ladenberg Thalmann Asset Management, told InvestmentNews. “But seeing a 600-point swing (upward) in less than an hour after the Dow is down 1,000 points tells you that there is still cash on the sidelines and that the data doesn’t support this kind of correction.”
Mohamed El-Erian, chief economic advisor at Allianz, attributed the recent selling to economic weakness in the emerging markets, notably a potential slowdown in China, the world’s second largest economy, and the sell off was exacerbated on deleveraging, fueled by panic.
Meanwhile, Tobias Levkovich, chief equity strategist at Citigroup, argues also argues that the U.S. market weakness is not reflected in the country’s fundamentals, pointing to a strong automotive, housing industry and a number of other economic indicators, reports Luke Kawa for Bloomberg.
“U.S. economic trends are still very much driven by domestic phenomenon and data points continue to intimate growth as opposed to developments overseas that are creating turbulence and distressing investors,” Levkovich said. “Specifically, American employment, plus consumer and capital spending (ex-energy) remain on track.”
Consequently, investors may be in for a rebound off these oversold levels.
Lekovich sees three indicators that are at levels close to the previous market bottom in October, which suggests a recovery is around the corner. Specifically, he pointed to the share of stocks trading at ore below 200-yda average within the same October 2014 levels; ratio of 90- to 30-day implied volatility is over two standard deviations below long-term norm; and the put/call ratio is above levels last October.
Canaccord Genuity’s chief U.S. strategist, Tony Dwyer, also sees four indicators that signal a rebound: jump in CBOE Volatility Index to over 20; falling percentage of S&P 500 stocks above short-term moving averages; weakening market momentum; and diminished number of bulls, reports Alex Rosenberg for CNBC.
“All four of our intermediate-term buy signals have hit required levels that surround a significant and sustainable low,” Dwyer said.