Constructive Signs Of A Short-Term Bottom

by: Chris Puplava

Summary

A quick review of credit spreads and investor sentiment readings shows that we may be at or near a short-term low on the S&P 500.

While we have had a sharp selloff in stocks this year (the S&P 500 was down 8% year-to-date as of Wednesday's close), credit markets are not showing widespread deterioration.

A reprieve from the recent bout of selling is likely in the weeks ahead.

A quick review of credit spreads and investor sentiment readings shows that we may be at or near a short-term low on the S&P 500.

In the 2010 market correction, the LIBOR-OIS and TED Spread began moving up before the market sell-off. When spreads rolled over the bottoming process began.

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After the 2011 mini bear market, stocks were finally able to complete a long drawn out bottoming process and move higher once spreads peaked.

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Prior to the current selloff, the LIBOR-OIS and TED Spread began to spike starting in December. The TED Spread, which is a measure of credit risk, has now come down from its highs while the LIBOR-OIS spread still remains elevated. If both of these spreads peak and move lower, this will be constructive for the market.

While we have had a sharp selloff in stocks this year (the S&P 500 was down 8% year-to-date as of Wednesday's close), credit markets are not showing widespread deterioration as measured by the Bloomberg Financial Conditions Index.

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Looking at investor sentiment, the AAII Investor Sentiment Survey percentage of Bulls recently hit a low of 17.9%. The only other time it has been lower was 1990, 1992 and 2005.

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Last time bullish readings were this low (in 2005), the S&P 500 rallied close to 10% over the next three months.

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Whether you believe we are now in a bear market or that this is just a correction in an ongoing bull market, a reprieve from the recent bout of selling is likely in the weeks ahead.