Battered Bottom Feeders Hope Speed of Sell-Off to Hasten Its End

(Bloomberg) -- When it comes to distributing pain, few stock market incidents rival this one for efficiency: there’s no precedent for the speed of the plunge. It may sound a little selective, but that’s reason for hope among some investors grasping for a bottom.

The scariest aspect of the rout that began four weeks ago today has been its suddenness. Down 33% at its worst point Wednesday, the S&P 500 is well past setting the record for the fastest-ever bear market. For traders who lived through plunges in 2000 and 2008 -- both bigger, but much slower -- the level of demoralization is starting to feel familiar.

“If we’re going to have a sharp short economic correction and get to the other side of it, you’d expect the market to have a sharp sell-off like this,” said Michael Antonelli, market strategist at Baird. “The speed and severity of it will shorten its duration.”

To state the obvious, it’s possible the rout will keep going. Besides the coronavirus, the seeds for cataclysm were already planted in a market that ran up so fast, with valuations stretched to breaking. As a result, after losing a third of its value, the S&P 500 still trades at a price-to-sales ratio 50% richer than its dot-com low and 160% higher than its financial crisis bottom, according to Bloomberg Opinion’s Nir Kaissar.

Still, it has taken just a month for U.S. stocks to complete the 30% plunge that matches the median loss for the last 10 bear markets. The average time it took the earlier episodes to finally get to a bottom was 1 1/2 years. The divergence could make perfect sense -- no past bear market was in response to an intractable global pandemic. But it’s perspective that deserves to be considered in trying to calculate how bad this one could get.

“You could be offsides and get your face ripped off in 48 hours,” said Dominic Nolan, senior managing director at Pacific Asset Management. “When you have indiscriminate selling of companies that you know are bellwethers, it seems fear and panic have taken over.”

The S&P 500’s 30% drop is only its seventh such since 1928 and its quickest by more than two weeks, according to Bespoke Investment Group. The only two instances where the speed of the decline was anywhere near as fast were in 1929 and 1987.

In places, “we’ve seen valuations come down to much more reasonable levels,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors, which oversees about $2.5 billion. Pockets of the market are “downright cheap,” she said, including small-caps, mid-caps and value stocks. “Those are the areas that I would be looking to put some of your money in right now.”

To Gina Martin Adams at Bloomberg Intelligence, breadth and volatility signals imply peak panic is emerging in stocks. For evidence, she points to the percentage of the S&P 500 trading above its 50-day moving average, which slipped below 1% last week. That matches lows posted only four other times in the past quarter-century. Following three of those instances, stocks were higher by an average 6.4% over the next 60 trading days and 17.5% over the next 12 months, she wrote in a note.

Demoralization and the bottom feeding it provokes were evident in the last few sessions. After six straight days of inflows, people finally stopped pouring money into the biggest exchange-traded fund. The $233 billion SPDR S&P 500 ETF Trust saw investors withdraw more than $6.5 billion in the latest session -- the most since October 2018, ending six straight days of inflows.

To Matt Maley at Miller Tabak & Co., that could be viewed as a bullish signal.

“We’re seeing signs the market is getting washed out,” said the firm’s equity strategist. “This one happening quicker means hope still sticks around longer and when hope is still alive, people will be much more likely to come back into the market place.”

On television, hedge fund manager Bill Ackman said he was aggressively buying stocks including Hilton. Bill Miller, among the most successful value investors of all time, told CNBC now is the best time since the financial crisis to purchase stocks.

Pacific Asset Management’s Nolan says the current situation looks like prior sell-offs that in hindsight proved to be good entry points. “If you fast forward two years and say I bought on March 18 of 2020 when it was a mess, I think you look back and think that is a pretty good entry point,” he said.

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