Stock market liquidation in the ‘settlement’ stage. Why does it need to “warm up” before it burns.

The violent turn of the US stock market this week may have left investors in shock, but a sell-off phase that may finally be underway probably needs to “heat up more” before it burns out, a trader warned on Friday. Wall Street’s top chart watcher.

One notable thing about the market’s wild two-day swing on Wednesday and Thursday is that market insiders (indicators that measure things related to the number of stocks advancing in an index versus stocks declining) were also seen affected, although they tend to be “less fickle”. than prices, Jeff deGraaf, founder of Renaissance Macro Research, said in a note Friday.

The Dow Jones Industrial Average DJIA,
tumbled more than 1,000 points, or 3.1% on Thursday after rising more than 900 points on Wednesday, while the Nasdaq Composite COMP,
fell 5%, the worst one-day performance for both indices since 2020. The S&P 500 SPX,
fell 3.6% on Thursday. Stocks closed lower on Friday.

There were strong domestic indicators this week as stocks rose after Wednesday’s Fed meeting, while Thursday’s sell-off was accompanied by one of the worst domestic indicators ever, with just 5% Russell 3000 RUA,
shares advanced amid an 8% volume increase, he noted. (see graphic below).

DeGraaf noted that back-to-back swings in internals on the scale seen this week are rare, with the latest occurring near the COVID lows in March 2020 equities. In fact, investors have never seen a swing in internals as as severe as the Thursday before the 2008-09 financial crisis (see chart below).

Revival Macro Research

But before talk of the COVID low gets potential bulls too excited, the analyst warned that the market might have a ways to go before running out of steam. Meanwhile, the S&P 500’s drop below Wednesday’s low turned a call for a stock market rebound into a “toast.”

“We’re entering a sell-off environment, and while they often burn, they get hot before they do,” deGraaf said.

Market watchers who doubt the stock has bottomed have also noted the lack of a convincing rise in the Cboe VIX volatility index,
o VIX, an options-based measure of expected 30-day volatility in the S&P 500. Market bottoms are often portrayed as the VIX, an indicator of nervousness among traders, spikes, but the rise in the index this week has been relatively moderate.

The VIX topped 35 in early action on Friday, above its long-term average below 20, but failed to break past last week’s high above 36, let alone March’s high above 37.

“This suggests that investors believe an even deeper sell-off may occur in the coming months and the Fed is expected to raise interest rates again by 50 basis points at the June meeting,” said Robert Schein, chief investment officer. of Blanke Schein Wealth Management, based in Palm Desert, California, with approximately $500 million in assets under management.

“If investors really believed the bottom is close, we would probably see an even higher VIX,” he said, in emailed comments.

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