Big stock market drawdowns like the current one often end with a selling frenzy, called capitulation.
“We have evidence of some capitulation, but probably not enough to call it a significant bottom,” says Doll.Investors buy put options when they’re bearish. They buy calls on a bet that stocks will rise. So, the overall put/call ratio tells you how scared investors are. Higher means more fear. Leuthold Group chief investment officer Doug Ramsey calls this his “desert island sentiment indicator.”
Look for a spike in the number of stocks getting trashed Verdict: The low is in — tradable bounce ahead. The upshot: “There’s a 95% chance we have seen capitulation for a tradeable bounce,” concludes McDonald. It could create a 20%-30% upside move.He cites two reasons. First, most investors are down a lot, and they just want their money back.Next, the Federal Reserve is going to “break something” with its aggressive rate hikes. Likely candidate: Something in the commercial real estate market.
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