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Analyst: Stock market ‘liquidation environment must get hotter’ before it burns.

Analyst: Stock market ‘liquidation environment must get hotter’ before it burns.

Stock market 'liquidation environment' needs to get 'hotter' before it burns out: analyst

Although investors may have felt shaken by this weeks violent U.S. stockmarket turnabout, a Wall Street chart watcher warned that a liquidation phase that may finally be underway will need to heat up before it burns out.

One remarkable thing about the market’s wild swing Wednesday and Thursday was that market internals indicators, which measure things related to the number or declining stocks in an index, were whipsawed too, even though they tend not to be as fickle as prices.

The Dow Jones Industrial Average
DJIA,
-0.60%
After a gain of more than 900 point on Wednesday, the Nasdaq Composite plunged by over 1,000 points or 3.1% on Thursday.
COMP,
-0.66%
The worst performance of both indexes since 2020 was a 5% drop. The S&P 500
SPX,
-0.51%
fell 3.6% Thursday. Stocks were lower on Thursday, but not at their session lows on Friday.

This week saw strong internals. Equities surged higher after Wednesday’s Fed meeting. However, the Thursday selloff was accompanied only 5% of Russell 3000 internals.
RUA,
-0.72%
He noted that stocks are rising amid 8% increase in volume. (See chart below).

DeGraaf said that back-toback swings in internals this week are very rare. The last one occurred close to the March 2020 COVID stock lows. Investors have never seen an internal swing so severe as that of Thursdays prior the financial crisis in 2008-09. (see chart below).


Renaissance Macro Research

The analyst cautioned that the market may still have some way to go before it exhausts itself, before the COVID low hype gets bulls too excited. The S&P 500s’ drop below Wednesday’s low has turned a call to a stock-market rebound into toast.

Were entering a liquidation environment and, while they often burn themselves out before they do, they get hotter sooner than they do, deGraaf stated.

Market watchers who believe stocks have not bottomed yet have also noticed a lack of convincing rises in the Cboe Volatility Index
VIX,
+3.78%,
VIX is an options-based indicator of the expected volatility of the S&P 500 over the next 30 days. Market bottoms often occur when the VIX, a proxy of trader jitters spikes, but this week’s rise in the index has been relatively modest.

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Friday’s VIX high was 35 in early trading, well above its long term average of below 20. However, the VIX has failed to capture the last weeks highs above 36 or the March high above 37.

Investors are predicting a further selloff in the months ahead, with the Fed expected again to raise interest rates by 50 basis point at the June meeting. Robert Schein is chief investment officer at Blanke Schein wealth Management, Palm Desert, Calif. with approximately $500 million under management.

He stated that if investors believed the bottom was near, then we would likely see a higher VIX.

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