The US Stock Market in 2022:Possible Capitulation on Monday 24th January 2022
Markets go up using the steps but come down in the elevator – market saying
On Monday 24/01 /2022, we are seeing some huge moves in the US equity market coming on top of some large
declines in the whole market in the last three weeks.
- Indices on Monday opened gap down lower and have traded sharply lower in very high volumes.
- At the time of writing at 6.00 pm London time,the SPX 500 is down 3% and the Nasdaq is down 3.5%
- The S&P 500 VIX volatility Index is at 38.26 which is double the level of a week ago and the highest level since October 2020. Volatility spikes like this often signal key turning points in the market and they do not last long. Investors looking to sell volatility e.g., by buying Autocallable notes should move fast to take advantage of this window of opportunity.
- For the year 2022, the main indices are in correction territory – i.e. down more than 10% (SPX 500 is down 11% and Nasdaq is down 14.9%).
The YTD moves in some key stocks and funds are shown below:
|Stock Name||Price on 24/01/2022 (6.00 pm London time)||YTD (% fall)|
|ARK Innovation ETF||66.9||-27.14%|
Some highly fancied stocks have fallen even more relative to their all-time highs, as shown below:
(% Below High)
|PayPal||Square||SNAP||ROKU||Crisper Therapeutics||Zoom Communications||Peloton||Nasdaq 100|
- Today’s move looks like a capitulation which can be defined as high-volume panic selling day which often marks a low of the market.
- Of course, the markets can overshoot on the downside, but it is likely that we are at a good short to medium term buying opportunity.
One way to consider this is to look at the P/E ratio of the S&P 500. Bloomberg publishes a Positive PE Ratio for the S&P 500 which only includes those companies which positive Net Income and EPS. This index is at 22.5 times having been as high as 27.9 during the previous year.
A P/E of 22.5 times means the earnings yield (E/P) is 4.4% and the Free capital yield is likely to be higher, say at about 4.8% to 5%.
Even if the 10-year US TSY yield (currently 1.71%) rises 80 bps higher in the next year or so to 2.5% an equity FCF yield at close to 5.0% represents good equity risk spread of 250 bp.
Some good stocks to look at include the following quality stocks:
|Stock Name||Price (US$)||Fwd. PE Ratio (X)||FCF Yield (%)|