Window of Opportunity - Valuations Below Pre-Pandemic Highs

Window of Opportunity

Six months of relentless and indiscriminate selling has roiled the markets. This selling has reduced the frothy pandemic induced run-up in stocks back to pre-pandemic levels. In many cases stocks are trading well below the pre-pandemic highs.

Stocks are now presenting a window of opportunity for long-term investors at this juncture. With the collective P/E ratios reverting to its historical mean, oversold conditions at extremes and the inflation picture at a potential inflection point may combine to be a back half of the year reprieve.

This window of opportunity may not last too much longer based on historical bear market metrics so pounce and pounce harder if the markets slide further.

Mid-June Flushing?

Many commentators in the investing circles stated that a final washout in the market was likely needed prior to moving higher in any meaningful way.

Mid-June saw its worst weekly performance since March of 2020, dropping 5.8% for the S&P 500 while taking its overall decline to ~24%. After this brutal week, there hasn’t been any stock or sector that has been immune to the breadth of participation in this sell-off. As such, the market has now registered abnormal extremes in selling and oversold conditions.

Is this the washout that was needed to arrest the selling pressures in this market, and will this be an inflection point? A battery of indicators suggest that the markets are close to making a meaningful move higher very soon.

Inflection Point?

The percentage of S&P 500 stocks trading above their 50-day average hit a level that can’t go any lower as seen over the past 20 years. This level indicates extremely oversold conditions (Figure 1).  

% Stocks Above 50-Day Moving Average

Figure 1 – Assessing overbought and oversold conditions via the percent of stocks relative to its 50 day moving average (adopted from CNBC).

It’s noteworthy to highlight that fewer than 25% of stocks are still within 20% of their 52-week high. The only times this was worse was the Covid crash and the 2007-2009 financial crisis. Over 42% of S&P 500 stocks hit a new 52-week low, only the tenth time since 1985 this total exceeded 40%.

The average Nasdaq stock has undergone a 50% drop from its high. The S&P 500 now trades at a level first reached more than 16 months ago in early 2021. This move negates the post-Covid advance in equity markets. The correction waves in February 2016 and December 2018 both bottomed at levels first reached nearly two years prior. Thus, these markets are reaching the point where the past two years of appreciation has been erased.

Stocks Are Looking Cheap

The current collective P/E a ~16, well off the pre-Covid high and not far above where it has bottomed in prior severe sell-offs in 2016, 2018 and 2020 closer to a P/E of ~14. The equal-weight S&P 500 finished mid-June at 13.1-times earnings. It’s noteworthy to point out that the markets bottomed in December 2018 at 12.9 and in March 2020 at 11 (Figure 2).  

SP500 Forward P/E

Figure 2 – Assessing P/E ratios over the past 10 years (adopted from CNBC).

Conclusion

The relentless and indiscriminate selling has reduced the frothy pandemic induced run-up in stocks back to pre-pandemic levels. Stocks are now presenting a window of opportunity for long-term investors at this juncture.

With the collective P/E ratios reverting to its historical mean, oversold conditions at extremes and the inflation picture at a potential inflection point may combine to be a back half of the year reprieve.

The percentage of S&P 500 stocks trading above their 50-day average hit a level that can’t go any lower as measured relative to the past 20 years. This level indicates extremely oversold conditions.

Fewer than 25% of stocks are still within 20% of their 52-week high. The only times this was worse was the Covid crash and the 2007-2009 financial crisis. Over 42% of S&P 500 stocks hit a new 52-week low, only the tenth time since 1985 this total exceeded 40%. The average Nasdaq stock has undergone a 50% drop from its high.

Bank of America’s Bull & Bear Indicator, which captures fund flows and other market-based risk-appetite measures, is well in the fearful depths that typically imply a buying opportunity. During prolonged stressed periods (i.e., 2000-’02 and 2008-’09) bear markets had this gauge persistently stuck at these low levels while prices continued to trend lower.

This window of opportunity may not last too much longer based on historical bear market metrics so pounce and pounce harder if the markets slide further.

Noah Kiedrowski
INO.com Contributor

Disclosure: Stock Options Dad LLC is a Registered Investment Adviser (RIA) firm specializing in options-based services and education. There are no business relationships with any companies mentioned in this article. This article reflects the opinions of the RIA. Any recommendation contained in this article is subject to change at any time. No recommendation is intended to constitute an entire portfolio. The author encourages all investors to conduct their own research and due diligence prior to investing or taking any actions in options trading. Please feel free to comment and provide feedback; the author values all responses. The author is the founder and Managing Member of Stock Options Dad LLC – A Registered Investment Adviser (RIA) firm www.stockoptionsdad.com defining risk, leveraging a minimal amount of capital and maximizing return on investment. For more engaging, short-duration options-based content, visit Stock Options Dad LLC’s YouTube channel. Please direct all inquires to [email protected]. The author holds shares of AAPL, ACN, ADBE, AMD, AMZN, ARKK, AXP, BA, BBY, C, CMG, CRM, DIA, DIS, FB, FDX, FXI, GOOGL, GS, HD, HON, IBB, INTC, IWM, JPM, MA, MS, MSFT, NKE, NVDA, PYPL, QCOM, QQQ, SBUX, SPY, SQ, TMO, and V.

Bear Market Q&A

The main question of bull or bear market has been answered quite loudly - BEAR!!! Now more investors are getting the memo and running for the exits at the same time. Steve Reitmeister, CEO of StockNews.com and Editor of the Reitmeister Total Return, is here to answer some questions about the current bear market.

Q: How long will this bear market last?

A: The average bear market in history has lasted for 13 months. That is measured from peak to valley. So in this case the peak of 4,818 was set on January 4, 2022. So if things went according to schedule we would say bottom is likely to be found around February 2023.

However the stock market rarely does anything according to schedule leading to the next question…

Q: Do you believe this bear market will be longer or shorter than the 13 month average?

A: I think it will be shorter because everything about the modern market works faster. Meaning that with so much computer based trading, volatility has increased with stocks rising and falling faster than ever before.

So quite possibly we find bottom faster this time around as well.

Q: Does that mean you expect stocks to fall less than the 34% average bear market decline because it will be a shorter time period?

A: Unfortunately not. I suspect we will wind up a bit closer to 40% decline given that the low rate TINA environment pushed stocks to higher than normal PE levels.

In fact many of the glamorous growth stocks of 2021 were seeing valuations not that far off the 1990’s tech bubble style levels. From that higher peak it will likely be a steeper than normal drop to find equilibrium.

Note that 3,180 represents a 34% decline from peak. And 2,891 is where we end up if 40% decline is in the cards.

Q: How should one interpret a positive day for stocks like today if we are in the midst of a bear market?

A: Consider this... does a bull market go straight up?

Of course not. There are extended bull runs followed by pullbacks and corrections. Yet as you look back over time the gains of the bull are undeniable.

Bear markets are no different. They don’t go straight down either. It is an ongoing process of bear runs to new lows followed by bounces and then another leg lower so on and so forth til bottom is found.

Now everything I said is my current guestimate with a wide range of potential outcomes. NOTHING about this bear, or any other, will go according to a preset pattern. That means we need to be flexible to adjust our plan according to the realities on the ground.

That includes when we start bottom fishing for the next bull run. We would rather be a touch early than a touch late.

That’s because on the late side there is usually a wicked 10-20% bounce from bottom that catches everyone by surprise.

So I suspect we will kind of work our way back to fully invested in 2-3 phases to never be leaning too far in the wrong direction when the market is finally ready to explode off the bottom.

Right now I imagine that first attempt at buying bottom would be around -30%…then down 34%…then hold on to that last part to see if indeed -40% is in the cards. However, at this stage we are getting WAY ahead of ourselves.

For now, there is likely a few months’ worth of bear market to come. Scary drops…shocking bounces (rinse and repeat).

Wishing you a world of investment success!

Steve Reitmeister… but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com & Editor, Reitmeister Total Return


About the Author

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.

Historical Bear Market Comparisons

2022 Bear Market

Although there’s not an official bear market definition, those on Wall Street define a bear market as a 20% drop in the broader index. As of late May, the Nasdaq, Russell 2000, and S&P 500 have all breached that 20% sell-off threshold. This bear market is largely due to a confluence of the China Covid lockdowns, the Russia/Ukraine war, persistent inflation, and rising rates. All these bear market inputs are eroding companies’ margins and negatively impacting profitability and growth.

Looking at historical bear market comparators, there’s been 14 since World War II. The S&P 500 has pulled back a median of 30% and the selling has lasted a median of 359 days, per Bespoke Investment Group. It’s important to put the median in a statistical context, median translates into half the time the index has fallen more than 30% while half the time the index has remained above the 30% sell-off level. The 2022 bear market is only 136 days in as of March 20th, 2022. Although the median values suggest these markets may have a way to go, the resolution of one or a combination of the macroeconomic issues may be the needed catalyst for the bears to capitulate.

Bear Market Comparison

Markets On Edge

It's been challenging to endure the last five months of indiscriminate and relentless selling across all asset classes. The wealth destruction has been vast and safe haven stocks have been few and far between at this stage of the bear market. The bear has finally mauled Walmart (WMT), Apple (AAPL), and the flight to safety commodity, Gold (GLD) in its path of destruction. Continue reading "Historical Bear Market Comparisons"

As Inflation Signals Cool, Various Markets Get Relief

Whether a bounce or something more extended, a bear market rally was bound to get off the ground sooner or later. It was a matter of time, with stock market sentiment this over-bearish.

Here is how the US Stock Market segment led off last weekend in NFTRH 706:

bear market

We then covered the technically bearish state of the major indexes, which are clearly trending down on longer time frames. Sentiment is a tool. TA is a tool. Macro fundamentals are another tool. These tools and others should be used together to refine probabilities in the markets. Continue reading "As Inflation Signals Cool, Various Markets Get Relief"

Three Ways To Trade This Market

Hello traders and MarketClub members everywhere. Yesterday certainly was a rout to the downside, decimating many stocks across the board. The Trade Triangles gave a major trend change sell signal on the NASDAQ index. Now with all three indexes in a negative mode and confidence and perception dramatically waning, I expect to see further downside price action in the markets.

So what are those three ways to trade the market?

Well, simply put you have three options when it comes to trading (I am not talking about options trading) you can be long a stock, short a stock or out of the market, which in and of itself is a position. Continue reading "Three Ways To Trade This Market"