It was a nice comeback on Thursday, but the stock market hasn’t bottomed yet, according to one firm’s checklist. Monday’s global rout did not reach the sort of pain levels that mark true correction bottoms, according to Strategas. Plus based on historical trends, it’s rare for markets to put in correction lows in August, market technicians Chris Verrone and Todd Sohn said, citing their own “Tradeable Low Checklist,” adding that September or October are more likely to see an eventual bottom. What’s worse, only one of the seven items on their checklist has been satisfied. Here are the items on the Strategas list: More than 50% of stocks hitting 20-day lows (reached 44% on Monday) Less than 20% of stocks trading above their 50-day moving average (47% before Thursday’s open) The 10-day advance/decline ratio needs to reach the 5th percentile (27th percentile at Thursday’s open) Total number of outstanding put options versus the number of call options needs to reach the 99th percentile, and was “just shy” of that in Monday’s sell-off The 10-day put-to-call ratio needs to reach the 99th percentile, but was in the 88th percentile premarket Thursday The relative strength index reading in the S & P 500 , a measure of momentum, must fall below 30 (“close, but not there yet,” the traders said) The CBOE Volatility Index (VIX) curve measuring the spot index to the VIX three months out must invert (this is the only yardstick to have been reached before Thursday) Of the items on the list, the VIX is the only one checked off, as the curve is meaningfully inverted with a spike on Monday due to the sell-off. In fact, the spot level of the VIX jumped higher than the level of the index three months out, signaling short-term panic. During Monday’s session, only 44% of stocks hit 20-day lows, and just 47% of stocks fell below their 50-day moving average – far above the traders’ favored range to mark a bottom. “It’s rare in this business that everything lines up perfectly, but in this instance, it seems like a pretty straightforward call… continue to tread lightly for now,” Verrone wrote in a Thursday note to clients. “This isn’t a hard science, it’s a balancing act – wait for the scales to tip, then go,” he also said. The three major stock indexes bounced back strongly Thursday, but the market hasn’t yet completely recouped Monday’s steep losses. Echoing the Strategas view, chart watchers at Raymond James believe more near-term weakness in the market is likely. Any bounce higher in stock prices offers investors the opportunity to reduce risk, said Javed Mirza and Majd Hijazi in a note out Thursday. “Our technical work suggests utilizing a pending counter-trend bounce as an opportunity to reduce risk exposure as an intermediate-term (1-3 month) corrective phase is likely to see heightened equity market volatility through September,” the Raymond James market technicians wrote.
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