During tumultuous and scary times like these, it is my job to pay particular attention to investor sentiment levels.
Extreme fear tends to mark stock market bottoms, just as the recent very high “market volatility” reading coincided with last week's stock market bottom.
However, last week we saw a typical rebound in U.S. stocks after a severe market decline. It was the "rubber band" effect.
Losing one third of the entire market capitalization has generally resulted in a bear market rally, which is exactly what we saw last week: The Dow Jones climbed 20% over just three trading days - its biggest 3-day advance since the 1930s.
While that may sound incredible, it was still a limited rebound that needs to be viewed with perspective - as it came on the heels of the biggest 5-6 week stock market decline in our lifetime.
In reality, the Dow Jones closed at 29500 on February 12th. Six weeks later the Dow Jones closed at 18,592, a jaw-dropping decline of 11,000 points. That's a loss of 37% of the market capitalization of 30 U.S. corporate conglomerates........ in 6 weeks!
Is it too much? Of course. More than one-third of the value of all U.S. stocks in 6 weeks? But, unfortunately, it's the way the stock market works.
When uncertainty is in the air, Wall Street takes a "sell first, ask questions later" mentality. It always overshoots to the downside, which is why extreme fear marks bottoms.
So should we rush in and buy stocks now on sale? Or will we get a better opportunity later to get back in at lower levels? I believe we will, yes.
Rarely do we see equities print "V-bottoms." The 4th quarter of 2018 was an example of a V-bottom, but they are very rare.
I believe we'll see a retest of the recent market bottom, testing the earlier price lows on the key US indices.
To be clear, I remain bullish longer-term. But I recognize how the stock market works when high uncertainty fills the air.
We will be looking to take advantage of additional selling in the weeks ahead.