What we learned from the stock market bottom two years ago

I just posted about the signs of euphoria that are building in markets. And why wouldn’t they be, the market has rallied six weeks in a row.

Here is a reminder from two years ago what the other side of that trade looks like. In October 2022, the gilt market blew up and that led to the ouster of Liz Truss while the market puked to the lows of the year when US CPI rose to 8.2% y/y.

But the doom and gloom proved to be a buying signal as this article showed, published exactly two years ago.

What were we doing in October 2022. Here is what I wrote on the day of the exact bottom at 3505 as the selling began to reverse intraday, resulting in a 5% intraday move:

What I can tell you is that there’s no mystery headline behind it.

There’s
no easy answer to explain the market moves. One thing I would highlight
is that sentiment right now is as negative as it’s been since 2008.
There aren’t many bulls out there and people are feeling pain. The
liquidation trades in utilities and telecom show mom & pop puking
stocks, which is generally a sign of the bottom.

Along
the same lines, JPMorgan was talking about a 5% decline in stocks if
CPI was hot today. When serious people are talking about a 5% daily
fall, sentiment is awful.

So the best you could
say is that this is something of a short squeeze or those on the
sidelines with cash stepping in. The UK pension system also doesn’t seem to be imploding so the ‘Fed will hike until something breaks’ crowd will have to move onto the next target.

Now it was tough to maintain conviction at the very bottom and few people were hammering the bid but the lesson going forward is that you want to look for horrible sentiment at the bottom and euphoria at the top.

Also if you go back two years, this was something I was repeatedly pointing to, when almost no one else was watching it.

The bad news is that euphoria is tougher to spot than capitulation and fear, it can also last longer. Still, I don’t think we’re there yet and here is the recent bullish indicator from the same AAII survey.

I think the fear-and-greed index is probably a better one for tops but I think it’s a good time to tune into sentiment and these kinds of things.

This article was written by Adam Button at www.forexlive.com.