Stock Picking Languishes as Traders Keep Hunting For Oversold Index Bounces

The fourth quarter of 2022 begins with stocks firmly in the jaws of a bear market. The S&P 500 and Nasdaq have had three straight losing quarters and are at their lowest points since 2020.

We start the quarter with many active traders looking for another oversold bounce. The pattern recently has been that the oversold market keeps becoming even more oversold, but traders are so anxious to catch a counter-trend rally that they eventually create some positive action. We had a good example last Wednesday when the S&P 500 bounced nearly 2%, but the move was reversed entirely the next day and there was even more downside on Friday.

The market has become extremely gloomy recently due to the relentless flow of negative news, but the problem is that even though market players are very negative, many of them have not liquidated positions to a great degree. There is a large disconnect between what investors are saying about the market and what they are doing, which prevents the sort of counter-trend movement that many traders hope to see.

Here on Monday morning there are worries about Credit Suisse (CS) , which is trading at its lowest price in decades. There is news that OPEC may cut oil production due to low prices, and Tesla TSLA is down after missing delivery expectations.

The good news is that the UK is backing down from some of its planned tax cuts, which helped to create a bond panic last week due to concerns about inflation. The UK is still a mess, but this is a slight positive.

The most important issue to keep in mind right now is that this is a macroeconomic, index-driven market. We are dancing to big-picture news, and all the movement is mostly due to index ETFs and futures. Individual stock picking is not working because valuations and the merits of individual stocks just aren’t significant right now. There is sector rotation taking place, but, in general all stocks are moving in tandem with the indexes because people are buying and selling instruments such as the Invesco QQQ Trust (QQQ) and SPDR S&P 500 ETF (SPY) rather than individual stocks.

If you are trading short term, there will be opportunity in the volatility of the indexes, but if you are a longer-term investor, there really is no reason to rush to put capital to work in individual stocks. The vast majority of individual stocks have broken charts and will need quite a bit of time to rebuild before they look attractive again.

We have a little positive action in the early going, but the pattern lately has been strong opens and weak closes, which is routine in bear markets. Play the bounces, but be ready to exit very quickly.

Leave a Reply

Your email address will not be published. Required fields are marked *