Market Bottom: What is Needed for a Rebound

After a truly wild month, the big talking point for investors right now is whether or not the market has bottomed. The fall from all-time highs to 52-week lows feels like it happened in the blink of an eye and has left plenty of investors shell-shocked. Some believe the bottom is in due to the speed and sharpness of the decline in March. Others think that we cannot bottom until the pandemic is under control and the nationwide shutdowns have subsided.

Will we retest the recent lows or has the extreme selling concluded? The market bounced off of its 52-week lows but has since cooled off slightly and seems to be looking for direction. It is impossible to call an exact market bottom, but there are certain signs to look out for that might help you with your investment decisions. Let’s look at a few things that are needed in order for the market to bottom and begin to rebound.

Declining Coronavirus Cases

The market is known to be forward-looking, which means that future events are usually priced in immediately. You could argue that the massive selloff in March was the market pricing in the impact of the pandemic, but there is still a lot of uncertainty surrounding the virus. The risk for negative headlines and bearish events that are not priced into the market remains high. Our economy is essentially in full shutdown mode and the number of Coronavirus cases continues rising progressively higher in the United States.

We need to see a decline in the number of Coronavirus cases in the United States before a market rebound can truly begin. As long as cases are on the rise, the impact of the virus on the economy and financial markets will continue to present downside market risk.

VIX Falls Back to Normal Levels

The VIX, or CBOE Volatility Index, is often referred to as a gauge of fear in the market. It is an indicator that has experienced historically high levels over the last month. If the VIX stays around its most elevated levels since 2008, it’s hard to imagine a recovery in the market. Even though the VIX has dropped off of its record highs over the past few trading sessions, it is still trading at the highest levels we have seen in years. This tells us that market volatility and downside risk are not going anywhere for the time being.

Unemployment Numbers Begin to Decline

There are plenty of economic indicators that are used to determine the health of the economy, but perhaps one of the most relevant at the moment is unemployment numbers. Jobless claims hit an all-time high of 3.28 million last week. These staggering unemployment figures have Goldman Sachs reported that they expect unemployment to hit 15% by June 2020. Figures like these are both concerning and extremely bearish for the overall market. Replacing millions of jobs is a long and arduous process. Until these numbers begin to improve, there will be more downside risk in the market. Also, many of the additional economic reports that move the market are lagging indicators, which means that the impact of the virus has yet to be fully quantified.

Dramatic Sentiment Change

It’s hard to find reasons that support a market rebound thesis at the moment. The overall market sentiment is extremely bearish and we have yet to see how company earnings will actually be affected by the coronavirus. Although there are plenty of investors that have been successful at buying when others are fearful, it’s difficult to imagine a market rebound scenario occurring until market sentiment improves. Until retail and institutional buyers start stepping in and we see some real positive economic headlines, it will be hard to declare that the market has officially bottomed.

Trying to call an exact market bottom is a futile effort, but you can still look to variables like the ones mentioned above for guidance on when a rebound might be on the table. If you plan on making equity purchases in the near future, understand that there is still significant downside risk in the market and make sure you are clear on your own personal risk tolerance levels.