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Here’s Why Oppenheimer Is Warning That We’re Only In Stage Two Of A Three Stage Sell-Off

Here’s Why Oppenheimer Is Warning That We’re Only In Stage Two Of A Three Stage Sell-Off

The market likely hasn’t seen a bottom yet, but here’s what investors can watch for now.

After their worst week since the financial crisis amid fears about the spreading coronavirus, stocks staged a rally Wednesday following Joe Biden’s big win on Super Tuesday.

The Dow gained 4.5% Wednesday, the S&P 500 added 4.2%, and the Nasdaq traded 3.9% higher. But while stocks were heading higher, some experts on Wall Street warned that investors shouldn’t bet on the market’s downturn being over just yet.

“To keep kind of trading expectations in check, very often there’s these bottoms that play out in three stages – one, you have the high-intensity low which I think was achieved [last] Friday just given the surge in the VIX and extreme levels and the daily RSI and stocks below their moving average,” said Ari Wald, Oppenheimer’s head of technical analysis.

On Tuesday, the S&P 500’s relative strength index (RSI) rose to 38, up from as low as 19 last week. Readings below 30 indicate oversold territory.

“After that, the market does tend to stage an oversold bounce; it does appear that we are in the process of that. This could last from days to even weeks,” Wald continued.

But after that, the third stage will likely see a retest of the initial low.

“What you’re looking for is signs that selling intensity is abating,” Wald said. “You’re looking for a less intense low. Specifically, it’s very bullish to see a new low but with a lower high in the VIX. That ultimately is your sign that the longer-term uptrend can resume.”

JPMorgan strategist Mislav Matejka echoed Wald’s sentiment to expect a “relief bounce” followed by a period where stocks would “remain under pressure for longer” as markets “struggle to rally sustainably” amid the coronavirus outbreak.

The market may not bottom until the number of new coronavirus cases reaches a peak globally. That’s according to Credit Suisse’s head of global equity strategy, Andrew Garthwaite.

“While lessons from the SARS outbreak of 2003 are becoming perhaps less relevant as this outbreak becomes very much more global, one key observation we think remains valid, that markets trough when the rate of new infections peaked,” Garthwaite said in a note.

The number of COVID-19 cases globally have topped 94,500 at the time of writing, while the death toll from the virus have reached at least 3,270. While new cases in China—the epicenter of the virus outbreak—have begun to fall, the number of new cases outside of China have been rising sharply.

One other signal Garthwaite is watching for is the form policy responses from fiscal and monetary institutions will take to stem the economic downturn from the coronavirus.

The Federal Reserve already announced on Tuesday an emergency half-point interest rate reduction, and Congress today approved an $8.3 billion spending packaged to combat the spread of the virus in the U.S.

“A supply side shock is much harder to address than a shock to demand, but we are now starting to see the first signs of a policy response from major central banks,” Garthwaite said. “Moreover, we are seeing some effort to ease fiscal policy.”

Washington Crossing Advisers portfolio manager Chad Morganlander agreed that it’s still too early to call a bottom for the market sell-off, and said there are severe economic disruptions in several areas that could continue to put pressure on stocks.

“Overall, there are three things that we’re concerned about: supply disruption issues, as well you also have earnings issues and economic growth issues,” Morganlander said. “We believe that earnings and economic growth have to be revised down rather substantially. Therefore, we’d be much more cautious with buying into this rally at this point in time.”

As for what investors should do in the meantime, Wald said selection is key as the market continues to be volatile. The Oppenheimer technical guru said that he is buying high-momentum stocks, especially in the technology space, on any pullbacks and lightening up on commodity-exposed sectors such as energy and materials.

Morganlander, however, says investors should stick with higher-quality investments, especially those companies with low debt.

“We’re telling investors to move away from companies that have a lot of leverage on their balance sheet,” Morganlander added. “Look at the steady Eddie companies that actually don’t need to go to the outside capital markets to finance themselves overall. So look at consumer staple companies. Many of them we think can do well in the short and intermediate term as well.”

Schwab Center for Financial Research’s vice president of trading and derivatives, Randy Frederick, cautioned investors: “Don’t panic and don’t sell on the lows.”

Frederick says investors shouldn’t try to bargain hut among beaten-down stocks quite yet, but offered up a guideline to stick to.

“My general rule of thumb, which has been pretty consistent is if you’re going to start buying on a dip, you need to wait until you get two good solid up days,” Frederick said. “People need to be a little bit cautious and wait. Just simply wait and see how this plays out.”

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