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A Selling Climax?

Both the US & Indian market have broken down previous lows and stocks have seen an extensive decline that synchronised with nearly all other asset classes except the US Dollar Index DXY. Equity, Bonds, Crypto and finally the Crude Oil have seen outsized declines. So it is fair to say there is panic in the markets and money is flocking towards the USD and is either being held in Cash or through Futures Derivatives. That indeed sets the tone for a selling climax.


For this we look at consumer sentiment, asset manager sentiment and trader sentiment.


Univ of Michigan Consumer Sentiment reading hit 59 in march & got a temporary bounce in April. We are yet to get June data, but its likely to have plummeted further due Fed rate hikes. In the past, at a reading of 56 on the same index had put in a bottom on S&P 500, including 2008. And we should be near that zone for June if not much lower.

Consumer Sentiment Survey - Univ Of Michigan
Consumer Sentiment Survey - Univ Of Michigan

Interestingly, the economic conditions survey by the University of Michigan puts the reading at 55.4 which is lower than the 2008 low 57.5. No wonder the sentiments are so low!


Economic Conditions Survey - Univ Of Michigan
Economic Conditions Survey - Univ Of Michigan

The Asset Managers Positioning on Equity Futures has hit record lows and this level of poor sentiment has lead to a reversal in the past just because too many people had piled up on the short side.


The trader sentiment and positions are also at historical lows. The AAII bull bear spread has hit 58% bears and the number is rapidly increasing each week. With bearish positions starting to overwhelm it is fair to say sentiment is at an extreme. According to the AAII Sentiment Survey, the drop puts optimism at a seven-week low. Bullish sentiment is below its historical average of 38.0% for the 30th consecutive week and at an unusually low level for the 17th time in 21 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, plunged by 9.9 percentage points to 22.2%. Neutral sentiment is below its historical average of 31.5% for the seventh time in eight weeks. It is also at an unusually low level for the second time in seven weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, jumped 11.5 percentage points to 58.3%. This is a seven-week high. It keeps bearish sentiment above its historical average of 30.5% for the 29th time out of the past 30 weeks and at an unusually high level for the 10th time in 11 weeks.

AAII Sentiment Survey
AAII Sentiment Survey

Clearly market participants have turned extremely bearish.


Meanwhile, major US Indices are approaching support zones. The Nasdaq 100 Index has a monthly support around 10800 on a CLOSING basis. With 8 trading days left, given the current sentiment, markets could put a bottom in place after a panic selling.

Nasdaq 100 - Monthly Chart
Nasdaq 100 - Monthly Chart

On S&P 500, the parallel channel has a support near 3520 for the month on a CLOSING basis.

S&P500 - Weekly Chart
S&P500 - Weekly Chart

For Nifty, on a daily time-frame, there is an expanding pattern developing with previous lows and points to risk of hitting 14600-14800 zones. At the same time, if it recovers after making an intra-week low to close above 15050 for the June month (Closing Basis). That should add as a reprieve for bulls from which a bounce or a reversal can build on.


Nifty - Daily Chart
Nifty - Daily Chart
Nifty - Weekly Chart
Nifty - Weekly Chart

With Crude starting to topple over and inflation likely to be topping out due to base effects, and more importantly, commodities under pressure too, the bond market is likely to take cue and reverse it rising yields., which again could be deemed positive for equity on the short term atleast.


Viewing this along with sentiment data, there is a strong case of a bounce back.


Conclusion is that we could see a selling climax with the levels of shorts in the sentiment and negative sentiment across the board for Consumers, Asset Managers & Traders. Either this selling climax has already happened/began last week or likely to happen & culminate soon.


As a word of caution, once a bounce materialises, it remains to be seen if its a temporary one or a bullish reversal depending on the strength of rally in breaking key Fib retracements. As far as Nifty is concerned, its likely to follow the US markets, so it could bottom along with it.

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