Paul R. La Monica
The brutal market selloff from last week continued (for the most part) Monday morning as investors worry that President Donald Trump's tariffs and a global trade war will lead to a worldwide slowdown. This begs the question: How to tell when stocks finally hit bottom?
Investors are clearly scared. The Cboe Volatility Index, or VIX, a measure often referred to as Wall Street's fear gauge, has more than doubled in just the past week to about 50. That's the highest the VIX has been since it briefly spiked to nearly 66 in August when investors were worried about the unwinding of the yen carry trade in Japan leading to a longer pullback in stocks and other risky assets.
That turned out to be a short-lived fear. Tariffs might not be.
"We all agree that the VIX is at an extreme level and it rarely stays this high for this long. But this seems to be forced selling. It's unrelenting. There are no buyers stepping in," said Katie Stockton, founder of Fairlead Strategies and portfolio manager for the Fairlead Tactical Sector exchange-traded fund.
Stockton noted that it was disheartening to see that there were few investors willing to buy stocks toward the closing bell on either Thursday or Friday. Strong closes can be a sign that the worst may soon be over, but not always. In fact, if stocks now start to show some signs of life in the coming days, they might be a headfake.
"Rebounds can be explosive. The biggest up days occur during bear cycles, " Stockton said, adding that due to "sentiment extremes and emotional trading," there can be "violent moves on the upside and downside."
Monday's continued market volatility seems to suggest that investors may not be looking to call a bottom until there's better news on the trade-war front. It may not matter what the technicals look like and the fact that the S&P 500 fell into bear-market territory, a more than 20% drop from a recent closing high.
"We're not seeing signs of capitulation yet," said Mike O'Rourke, chief market strategist with JonesTrading in an interview with Barron's, referring to the phenomenon where selling is finally exhausted and bottom-fishers start hunting for bargains.
"News from the Trump administration has not given any indication of progress with trade deals. We will have continued pressure on stocks until we get a positive development," O' Rourke added. "Once the administration cuts the first deal, that could be a roadmap for other counties to follow."
To that end, stocks briefly turned positive in midmorning trading Monday on social media headlines suggesting that the Trump administration may be willing to enact a 90-day pause on tariffs with all nations but China. But that pop was short-lived after the White House said the news wasn't real.
So how can investors know when the rout is over?
O'Rourke said that if the market selloff continues through Wednesday, that might finally be the end of it. He argues that given how high market valuations were for the S&P 500 (particularly the Magnificent Seven tech megacaps) at the start of this year, more selling is needed.
"Yes. we may be blowing through technical levels on the downside," he said. "But we started with a very expensive market. A lot of froth had to come out and it is coming out."
Given the concern about the impact the trade war may have on the automotive sector, O'Rourke said he's also looking closely at Ford Motor stock as a proxy for when the broader market slide may end. Shares of Ford, trading around at $9.17 on Monday, set a 52-week low of $9 earlier that morning. O'Rourke said that if Ford is able to hold the $9 level, that could be a good sign that a bottom may be near.
Adam Turnquist, chief technical strategist for LPL Financial, also thinks that investors can start looking for signs of a bottom -- but that we're not there yet.
Turnquist told Barron's that even though a growing percentage of stocks are below short-term and medium-term moving averages, the market may not be washed out until there's more selling.
"We haven't found support," said Turnquist. "We're still trying to assess the bottom."
The good news is that the market might be closer "to some type of capitulation," Turnquist said. He suggested that a level of 4800 for the S&P 500 (which the index got close to Monday morning) could be one that "for long-term investors may be close enough to get back in to the market."
But another strategist is still predicting a lot more downside ahead due to the trade war.
"There is no sign of bottoming," said Tony Roth, chief investment office with Wilmington Trust.
"What is going to matter the most is not the tariff levels but the context around them," Roth told Barron's. "Is the administration going to indicate it's interested in striking reasonable deals or is this doctrinal and establishing a new world order? What we're learning is it may well be the latter."
With that in mind, Roth said the S&P 500 could potentially fall to a range of 3800 to 4200. That's another 16% to 24% lower than where the market is now trading.
Write to Paul R. La Monica at paul.lamonica@barrons.com
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(END) Dow Jones Newswires
April 07, 2025 12:35 ET (16:35 GMT)
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