Volatility is the name of the game for 2022! Volatility does not mean the market is crashing; it means there are big price swings in both directions. Volatility is always more exaggerated during a Bear market.

The price range of the C fund over the past 2 weeks was 13%. That’s HUGE! The high from last week was 4300 and the low this week was 3850. In 2021 we had a handful of days with a 2% or greater price move. In 2022 we see those kinds of moves several times a week! Your investing plan has to fit the market. The plan in 2022 should look nothing like the plan from 2021. In 2022, your plan must take high volatility into account.

For the week, the C fund was down 2.41%, S fund down 2.53%, I fund down 0.42%, F fund up 0.93% and G fund up 0.058%.

Finding A Bottom

Even with Friday’s rally, the market is so oversold, there isn’t really anything new to discuss in terms of chart analysis. Instead, I want to break apart a great article that posted last Friday, May 6th, by Tom Bowley. “There’s One Missing Ingredient for a Market Bottom, And It’s The Scariest One of All”. It’s a short article with only 2 charts. I’m going to paste the article here and add some comments on the updated charts. I highly recommend hitting the link and reading it for yourself. If you click on the charts in the link, they open the interactive current charts.


The article begins:

“As we closed out 2021, I began discussing sentiment and its need for a “reset.” We had moved higher for the better part of two years, and the U.S. stock market had picked up a lot of new “post-pandemic” investors and traders. Unfortunately for this new crew, they had only experienced success and a rising market. It was one of my warning signs that I discussed at MarketVision 2022 on January 8th, 2022.

You don’t just flip a switch to generate the kind of bearishness that it takes to mark major bottoms; it evolves over time. The problem, however, is that the generation of this extreme bearish sentiment only occurs after one thing: a period of falling equity prices and one final the-market-will-never-go-up-again type of market calamity.

We’re not there yet – not even close, actually. And that’s what scares me.

On Thursday, the day after we saw a post-Fed surge in U.S. equities, we lost all of those Wednesday gains and much, much more. But did you see the equity-only put-call ratio ($CPCE)? It was .63.

Let me give you some context with respect to this reading. Every significant market bottom this century has occurred with a 5-day moving average of the equity-only put call ratio at .75 or higher. Nearly every one has occurred with this 5-day moving average at .80 or higher. And on Thursday, one of the worst days we’ve seen in a very bearish 2022 prints a .63 reading. In a nutshell, that’s the reason why we haven’t bottomed yet. Traders continue to believe that the market is suddenly going to surge right back to new highs. They’ve been “trained” to believe this by the last two years.

The following S&P 500 chart has the 5-day moving average of the equity-only put call ratio in the panel beneath it:

I circled all the key price bottoms over the past two decades. There were 18 of them. 15 saw the 5-day moving average of the equity-only put call ratio peak at .80 or higher (black circles). The other 3 saw it peak at .75 (pink circles). There are no other key bottoms on this chart. Will the 2022 bottom be different from all the others? I doubt it.

So how do we get this moving average to .75 or .80 when Thursday’s reading, on one of the most bearish days of the year, was only .63? This moving average is just .62 right now. To see this moving average jump to at least .75 will likely require much more bearish market behavior. But here’s the scary part. The 5 days leading up to the market bottom are usually among the worst throughout the entire downtrend. Look at this 5-year S&P 500 chart:

The bottom panel highlights the 5-day ROC (rate of change). Note how steep the selloffs are to mark these market bottoms.

I do remain firmly bullish long-term. And I believe the low and upcoming market bottom in 2022 will provide a tremendous opportunity for patient investors and traders. That is the exact same thing I said at the end of 2021 and I believe nothing different now.

Get ready to buy, but not just yet. Stay tuned.

In the meantime, I want to invite all of you to subscribe to our FREE EB Digest newsletter, which is published 3x per week on Mondays, Wednesdays, and Fridays. There is no credit card required and you may unsubscribe at any time. Everyone on this newsletter receives an automatic invitation to all of our free webinars. CLICK HERE to sign up with your name and email address. We do not share your information with any outside third parties.

Happy trading!

Tom


Remember, this article was posted 1 week ago. Here are the updated charts.

In the updated chart, we see that the 5 day moving average of the put/call ratio has risen to 0.75. Price has just entered the range of a potential bottom by this indicator. Remember that the 0.75 level bottoms were very brief corrections. They are the pink circles. If this bear market is going to be more like 2007/8 then we will see a recovery rally that does not go to new highs. This will be followed by lower lows until an ultimate bottom is found.

At the same time in the updated chart, the ROC indicator has undercut the green line at -5. The market often bottoms at the -5 level, but not always. During the Covid collapse, ROC was below -5 well before price bottomed. The Put/Call Ratio and ROC indicators are calling for A bottom here but, not necessarily THE bottom…

Bottom Line

The Put/Call Ratio and ROC indicators are telling us that a bottom is imminent. This bottom will be followed by a recovery rally that may have begun on Friday. The question is not, “are we at a bottom?”. The answer to that question is probably yes. The real question is, “are we at THE bottom?”. The answer to that, in my opinion, is probably no.

We have 2 weeks until the TSP goes dark on 26 May. It couldn’t happen at a worse time but, it is what it is… If the market goes into rally mode, I’m going to miss it. I can’t another head fake without the ability to get out of the stock funds. This decision is based on my personal circumstances and risk tolerance. It may or may not be right for you…

Have a great week!

Jerry