Stocks and global growth sentiment pointing to ‘full capitulation’

With last week’s drop in all stock indices, investors seemed willing to start the search for a market bottom. The S&P 500 is down over 23% year-to-date (YTD), while Nasdaq is down over 32% YTD and far removed from its November 2021 highs. 

Strong earnings shown by financials, health care, and consumer staples companies on October 17 helped fuel a short rally, where these three market niches outperformed the S&P 500 for the day. 

However, there is still a lot of negative sentiment in the markets, with market participants looking to the Federal Reserve (Fed) and its fight against inflation for more ques on where markets might move. Similarly, the sentiment on stocks and global growth among fund managers, a survey done by Bank of America (NYSE: BAC), showed full capitulation. 

“Sentiment on stocks & global growth among fund managers surveyed by Bank of America shows full capitulation, opening way to an equities rally in 2023. Cash levels 6.3%, highest since Apr2001, well above long-term avg of 4.8%. Tasty morsels for bear rally (if UST yields stay <4%).”

Namely, the survey showed that cash levels are at their highest since April 2001, above the long-term average of 4.8%.

Another indicator

The survey by Bank of America (BofA) highlighted another market indicator, which can help pinpoint a bottom or a near bottom in the bearishness. The valuation and valuation difference in forward Price-to-Earnings (P/E) ratios between the Russell 2000 and the Russell 1000. 

The small-cap Russell 2000’s P/E is at 11, the lowest since 1990, while the Russell 1000 is at 15.5, in line with long-term averages. However, the difference between the two is now at 0.71, well below the historical average of 1.01.

No guarantees  

While historic signals can offer a good orienting device in the markets, they can hardly predict the exact point when to buy or sell stocks. 

Though negativity in the markets seems to be at its peak, tracking signals for the next few weeks before deciding if the rally will have legs would perhaps be the most prudent thing for investors. 

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