February 11, 2018 / 12:03 PM / 11 days ago

EXPLAINER-Eight signals to watch that the U.S. stock rout is over

    NEW YORK, Feb 11 (Reuters) - Stock investors on Monday will
be seeking to divine if the deepest weekly slide since January
2016 will continue or if the market will turn the corner after
one of the most volatile five days in years. 
    Equal parts science, art and luck may be needed to pick a
bottom in the S&P 500. While it ended last week on an up note,
the index was caught in its first correction in two years, after
a 7 percent rally this year that culminated with a record high
on Jan. 26, following a 19 percent 2017 gain. 
    While Wall street experts caution that it is difficult to
definitively pinpoint a turning point, several said they will
monitor a number of indicators that could help show if the
selloff has ended.
    "People sometimes get pulled into wanting to call tops or
bottoms," said Frank Cappelleri, chief market technician at
Instinet in New York. "I would say it is almost impossible to do
that, especially on a continued basis, but I think identifying
patterns when they develop can at least give you a sense that
things are turning just a bit."              
            
    FEWER NEW LOWS: Wall Street's main stock indexes climbed
more than 1 percent on Friday, giving investors some solace
after a week of huge swings that shook the market out of months
of calm.
    Even with Friday's gains, the benchmark S&P 500 fell 5.2
percent for the week, its biggest weekly percentage drop since
January 2016, as volatility spiked.
    "You want to see that less stocks are making new lows even
if the whole market is down," Keith Lerner, chief market
strategist at Suntrust Advisory Services, said in an email. 
    In one positive sign on Friday, 65 percent of S&P 500 stocks
made new 20-day lows, compared with 79 percent on Tuesday,
Lerner said. 
    "What you want to see eventually is strong buying. You want
to see multiple days where 90 percent of the volume is positive
(stocks that are rising,)"  he said. 
    
    SEARCHING OUT THE SECTORS: Cappelleri is watching for
pockets of strength. "That's step one: seeing the bleeding stop,
at least for a few different areas or groups. And then from that
point we can see if that broadens out a bit," he said.
    Better performance of economically sensitive sectors such as
financials could be a sign that investors are becoming less
bearish. "When people feel better about the market you don't
want to see utilities lead," Lerner said.
    
    TECH TRIPS UP: "Any final flush for U.S. equity markets has
to pull this group much lower and very quickly," said Nicholas
Colas, co-founder of DataTrek Research. "One big reason we don't
think U.S. stocks have bottomed: this hasn't happened yet." 
    The S&P 500 technology index           led market gains in
2017, rising 36.9 percent for the year. The technology index is
down 0.28 percent so far this year, while the S&P 500        is
down 2.02 percent. 
    
    VIX VISION: The market's fear gauge, the CBOE Volatility
Index       , known as the VIX, has spiked in recent days and
earlier last week hit its highest level since August 2015. "I'd
like to see the VIX tamed and move back to the lower end of its
trading range," said Bucky Hellwig, senior vice president at
BB&T Wealth Management in Birmingham, Alabama.
    Colas said: "It is a declining VIX (often over weeks, not
days) that sets the floor for stocks, not a peaky top. So even
if this week was the high water mark for the VIX in this
correction, we may well see stocks slip further."
    In the months before the selloff, the VIX was trading
between about 10 and 13, well below its long-term average of 20.
It closed Friday at 29.06. 

    RELATION TO RATES: An increase in bond yields has been seen
as a catalyst for the selloff, presenting investment competition
to equities at a time when stock valuations are expensive. "If
we see some stabilizing in interest rates and bond yields in
particular, that would seem to indicate what's going on there
has settled down," Hellwig said.
    U.S. benchmark 10-year Treasury note yields            early
last week surged to 2.885 percent, the highest level since
January 2014.
       
    PANIC SAFE-HAVEN BUYING: Jim Paulsen, chief investment
strategist at The Leuthold Group in Minneapolis, is looking for
"full-on panic." There has been no sign of investors rushing
into safe havens such as gold, U.S. Treasuries and the dollar. 
    "To find the end you need to see evidence that it truly has
convinced people it's going to go down more, or there's panic,"
Paulsen said. "And I just haven't seen that yet, at least in
behavior."
    
    MINDING MOMENTUM: Vincent Catalano, global macro strategist
at Blue Marble Research in New York, is watching a key indicator
of market momentum known as the moving average convergence
divergence line, or MACD. "When the line starts to flatten out,
that's an indication that the pressure is ending, that we've
reached the short-term bottom," Catalano said. MACD is a
momentum oscillator widely followed by chartists that is based
on the relationship between moving averages. 
    TEST OF 200-DAY MOVING AVERAGE: In the most recent bull
market's pullback, the 200-day moving average of the S&P –
currently at 2,539 - has been tested, said Brad McMillan, chief
investment officer of Commonwealth Financial Network in Waltham,
Massachusetts. On Friday, the S&P 500 briefly dipped below that
level before rebounding. "That's typically what we've seen in
past market cycles. It's stopped and bounced around at that
point," McMillan said. But if the S&P 500 were to sustain losses
below that mark, he said, a "big round number," such as 2,500,
would be the next support level he would look for on the S&P.

    
 (Reporting by Lewis Krauskopf, Sinead Carew, Caroline
Valetkevitch, April Joyner, Chuck Mikolajczak; Editing by Alden
Bentley and Leslie Adler)
  
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