According to the swiss bank’s recent strategy report, the four-week moving average of global earnings revisions has turned negative for the first time since March, and historically, when earnings revisions turn negative, the S&P 500 has fallen 2% and 3% over the following 1 and 3 months (see table). This means some more blood is expected in the market before the calm settles in.
Here are 5 indicators from CS showing that we are close to a market bottom:
“1. European sector risk appetite is low (at 0.9 standard deviations below its norm), but previous lows were seen at more extreme levels (2 std below its norm).
2. The bull/bear ratio of Individual Investors is now low (but this is an unreliable indicator and very volatile and tends not to be a good buy signal). The more reliable and less volatile sentiment signal in our view is the financial advisors bull/bear ratio and that is not extreme.
3. The aggregate equity sentiment indicators (which is based on the put/call ratio, inflows into equity funds, slope of implied vol skew and bullish sentiment) is now 0.8x standard deviations below its norm (the previous three market lows were between -1.0, 1.23 and -1.53 standard deviations below its norm).
4. The proportion of NYSE stocks above the 10-week MA is currently 16%. Sub-10% for 1 to 5 days has been seen at the last two market lows.
5. The net long position of hedge funds on data provided by our Prime Broking desk is now almost at last November lows (and much lower than the bull/bear ratio suggests that it should be).”
Other tactical indicators, however, are not at these levels:
– Jonathan Wilmot’s risk appetite indicator is at -1.22 compared to a panic level of -3;
– Our US sector risk appetite indicator is only 0.65 standard deviation below its norm;
– We have yet to see outflows from equity mutual funds on the scale of last year’s low;
– Insider buying is rising, but not yet consistent with a market low – nor is net corporate buying (though the data tends to lag).”