Bulk of the Bounce is Complete, Yet a Durable Market Bottom Lies Ahead

The market sell-off from a week ago prompted some tactical buy opportunities, resulting in a stock recovery in the subsequent days, which helped to recover some of the previous week’s losses.

Strategists at BTG believe that “the bulk of the bounce has likely run its course,” advising investors to consider reducing their exposure as the S&P 500 approaches the 5400-5440 range. In a Sunday note, they stated, “A final durable low is likely still ahead of us.”

The strategists noted a historical trend: “We find it hard to identify a drawdown of 5% or more for the S&P 500 that ended without a breadth washout (fewer than 20% of components above the 20-day moving average). Last week’s breadth reached only 31%. Unless this time is different, we should anticipate another decline to fully wash out breadth.”

BTIG also highlighted that market sentiment is mixed, with put/call ratios returning to levels not seen since April, which is a positive indicator. However, the NAAIM exposure index, which measures the average market exposure of active investment managers, remains elevated, surpassing typical levels seen during market downturns.

In terms of sectors, consumer stocks continue to exhibit widespread weakness, while defensive stocks are consolidating near their recent highs. BTIG maintains a favorable view on real estate investment trusts (REITs), recognizing their strength at the breakout point. Conversely, they see homebuilders as vulnerable as long as they remain below key resistance levels.

Regarding small-cap stocks, BTG points out that the iShares ETF remains below the crucial resistance level of $210 and advises caution until that level is reclaimed.

On the commodities front, gold appears to be well-positioned for a potential increase, with the relevant ETF consolidating while testing the $225 level for the fifth time in recent months. The strategists believe that “a breakout seems imminent.”