Santoli: This market has entered the 'Slinky descending the stairs' phase

Published Thu, May 12 20221:33 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. The market has entered the "Slinky descending the stairs" phase of the decline, where it drops another step because of the momentum generated by having fallen to the prior step. More pressure on the biggest stocks, shock of crypto losses absorbed in non-crypto parts of portfolios, wide daily ranges and illiquid trading conditions are keeping would-be buyers less aggressive. At some point, this action goes far enough — or too far — and those needing to sell are done and are replaced by those who view the chances for a bounce as worth playing. It could be getting close to such a moment of at least temporary relief, though overshoots happen. The backdrop is discouraging for bold risk-taking — there's a narrow path to soft landing, tighter financial conditions but not tight enough to dissuade the Federal Reserve from 100 basis points of hikes by the end of July, as well as waves of liquidation from impaired big investors. Of course, the news will be similarly daunting at the low, wherever that is. The question — as always — is whether enough has been priced in yet. At its intraday low, the S & P 500 was 19.5% below its record high. In my weekend column , I noted the unusual frequency of deep corrections that stopped at between 19% and 20% losses on a closing basis (in 1990, 1998, 2011 and 2018). I'm not saying this one is done, but that level represents a sensible tactical spot to cover shorts and buy some upside lottery tickets, perhaps. That also coincides with the Nasdaq being down 30%, GME trading under $100, AMC cracking $10 and the forward S & P 500 P/E touching a neutral-ish 16.5x. In a downtrend, the standards for judging when the market is oversold or hated enough to invite a bounce are more demanding, and the tape needs to be stretched further to create a decent contrary signal. We were getting there as of this morning but not quite by some gauges — the percent of stocks above their 200-day average, etc., were more severe in the late-2018 downturn. Still, folks are selling with urgency, playing defense and growing concerned. The CNN Fear & Greed and the NAAIM professional-advisor equity exposure indicators deeply depressed: Retail and housing stocks are getting a lift today, with lower yields and washed-out stocks doing some of the work. Real-time consumer activity has held up OK. It's not a forward-looking signal, but then neither is last month's inflation data. AAPL continuing to break in a catch-down move, with the fearful money hiding in "best in class" stocks leaking out a bit. Seems like something that happens as a harsh sell-off is running its course. Though to be clear, any bounce will be suspect until proven otherwise, and will have to be very forceful and broad to get the benefit of the doubt. Value is emerging as prices sink faster than corporate fundamentals are eroding. The equal-weight S & P 500 is trading back trading at 14.5x forward earnings, well below its seven-year average, though still a bit above the panic-low levels reached in the 2018 and 2020 market sell-offs. Market breadth is not bad today, evenly split between up and down volume. The VIX is up a few ticks near 33, its relative lethargy in the face of successive new stock-index lows is a big debate point now. Seems the steady, grinding nature of the market slide and the fact it's been ongoing for weeks means both that traders are well-hedged and that there are no intense bursts of selling. There's also enough divergent action within the S & P 500 — defensive and energy stocks hanging in there, 80 names less than 10% off their highs — that correlations have not surged to the kind of extremes that juices the VIX. In all, it reflects frustration — not low enough to imply a more stable market with a threat past; not high enough to represent a crescendo of buyable fear.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, May 9, 2022.

Brendan McDermid | Reuters

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics.