The age-old question of when will the stock market bottom amid runaway volatility may have a new answer: more than once. A classic “double bottom” market describes a pattern where an index falls, then recovers, and then falls back to the same previous level. “We are here preparing for a retest of the June low simply because there are no willing buyers in the market right now,” said Mark Hackett, Nationwide’s director of investment research.
Analysts and investors are looking back to June as the established bottom for the bear market decline, but the September lows show that the market rallied ahead of schedule mid-summer and that the current decline could match or surpass the June lows. Technical analysts believe that the market functions in recognizable and even predictable chart patterns. The S&P 500 closed below 3,900 last Friday, suggesting the index could drop to the 3,640 range seen in June. While it may feel like this year’s market volatility has been endless, analysts believe this bottoming could position us for a recovery in the coming months. “We’ll never really know if stock market bottoms are coming this year without successfully testing the June bottoms,” wrote John Lynch, CIO of Comerica Wealth Management.
Hackett explained that double bottoms have a strong psychological impact on investors — and they don’t necessarily have to be mathematically exact to act as conditions for a market rally. “There is a self-fulfilling prophecy to a [double bottom]’ Hackett said. “You won’t see much investor enthusiasm until you retest that June low,” Hackett said. As investors anticipated more volatility in September, a new low could signal that the market is positioned for a bounce. A double bottom is a sign that the market has absorbed the pain of the economic factors that drove the decline and the turning point is positioned for an uptrend. Lynch stated that once a double bottom in the index range of 3,640 is reached, that low could “potentially provide investors with a solid base from which to navigate a more positive market trend going forward.”
While the summer saw an encouraging rally for stocks, analysts say it was an exception to the broader market trajectory, not a new trend. A variety of macroeconomic conditions including rising interest rates and the Fed’s policy response, geopolitical conditions including Russia’s ongoing invasion of Ukraine, and ongoing destabilization due to the Covid-19 pandemic have all been internalized in the market. “August inflation readings gave the financial market another reason to conclude that the mid-summer rally was indeed a countertrend as the core, as measured by consumer and wholesale prices, came in worse than expected,” Lynch said.
Despite the fact that inflation and Fed policy took the brunt of the blame for the market’s September lows, analysts say it’s actually part of a seasonal pattern we see annually in the market, which in and of itself is a Sign of this is that the market is still functional with some degree of normalcy. A drop in September during earnings season means stocks are likely to follow a positive seasonal pattern into the winter. “The good news is that we’re past this soft patch and the fourth quarter is typically the strongest quarter of the year,” Hackett said.
Another factor that could bring some stability to the markets is the upcoming US elections in November. Midterm elections provide companies with information about likely corporate policies, and this reflects the sense of security in the market. Historically, the mid-election years marked by market volatility have also seen rallies averaging 32% from their market lows over the next 12 months.
When will the market bottom out? “I think if we can get through the next two to three weeks where there’s a lot going against the market and weather this short-term volatility, it won’t be very difficult to beat expectations over the next six months,” Hackett said. Lynch advises investors to think long-term. “Markets may be volatile, but they often prove resilient for patient investors,” Lynch wrote.
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