The actions were a horror show. Here’s how to tell when the market is close to capitulation


Traders work on the floor of the New York Stock Exchange (NYSE) in New York, April 6, 2022.

Brendan McDermid | Reuters

How do you spell “surrender?” FEAR.

That’s what this market begets, and there’s been no escaping that wild bear for your lunch. In black and white, the S&P 500 was down 14% from Jan. 3 to May 2, and the Nasdaq has lost 23% of its value since mid-November.

Let that in: for the S&P 500, that’s a $5 trillion loss. For the high-risk Nasdaq, the decline took off around $7 trillion in value, including many names in the S&P 500 as well. To put that into perspective, one of the largest fiscal stimulus programs in the The country’s story – the CARES Act of 2020 – designed to save the country, was about $2 trillion.

In comparison, the gross domestic product of the United States, the value of goods and services produced there was $21 trillion in 2021, only three times that recent market implosion. It is even much more than the net worth of Elon Musk.

April was heartbreaking for investors

Six weeks ago, after the March lows, I wrote an article suggesting that the correction presented investors with some bargains they should start considering. Turns out I was too early. Although the S&P 500 rebounded, climbing 11% in about two weeks, it failed to hold onto those gains and returned them all and more.

April’s 8.8% decline was, quite simply, a heartbreaking disaster for most investors, the type veterans like me have known enough to know nausea is an occupational hazard. Still, we’re sitting roughly at the same level of the S&P 500 where we were a year ago, and comparable to December 2020 for the Nasdaq. I wish someone with an accurate crystal ball had told me this a year and a half ago.

However, that never happens, so we look at the cold, hard statistics of the market and analyze what we see. The S&P 500 is trading at a multiple of 18.8 times this year’s estimated earnings and 17.2 times 2023 earnings. Those numbers had fallen since the start of this year, when the price-earnings ratio was 21. .5 times 2022 and 19.6 times estimated 2023 earnings, according to FactSet.

The market capitalization of the top five stocks in the index: Apple, Microsoft, Amazon, Tesla and Alphabet, which trade, as a group, at 29 times earnings, drives the overall S&P 500 multiple higher.

As the chart below illustrates, if you exclude those five stocks, the remaining 495 stocks are selling at a price-earnings ratio of 16.7 times 2022 earnings and 15.7 times 2023 earnings – far exorbitant price valuation. Data is current as of the May 2 close.

(Note: The charts below show the top six companies to reflect Alphabet’s two-class share structure.)

Foraging through the wreckage for bargains

There are now 137 stocks with market caps above $5 billion that are 40% or more below their six-month high, and 53 that are down at least 60%.

Patient investors should start sifting through the wreckage of these cohorts to uncover attractive stocks to munch on. The most important variable (which is not easy) is whether these companies can meet their earnings per share estimates in a rapidly changing environment of inflation and rising interest rates.

Reading the charts will provide no comfort to potential buyers of these depressed stocks which are all in technical purgatory, overwhelmed from above by huge amounts of “resistance”. My definition of this term is when many stock owners have lost so much money that they are ready to sell after any upward movement.

While that remains true, techs can’t really call bottom until it happens. Deploying secondary cash to invest in strong companies that you may have been following for years could be a smart move. Let’s keep an eye on the FEAR index, we’ve been watching a horror movie for months, and once everyone closes their eyes, we don’t see the bargains anymore.

Karen Firestone is President, CEO and Co-Founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.


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