Extreme fear and capitulation: looking for signs of a market bottom
UK stocks continue to surpass all expectations by being one of the best performing regions for equities around the world.
A near-2% loss for the FTSE 100 index is much better in relative terms than the 28% decline seen for the US Nasdaq or a 15% fall for Hong Kong’s Hang Seng year-to-date. Until recently, UK stocks had been the laggard for global equities for many years. Now a queue is forming to own them.
This year’s slump in US stocks will have taken a lot of investors by surprise. Names like Apple (AAPL:NASDAQ), Amazon (AMZN:NASDAQ), Microsoft (MSFT:NASDAQ) and Tesla (TSLA:NASDAQ) have for some time been the star stocks in investors’ portfolios and many assumed they would retain this status indefinitely.
That’s not the case this year. Telsa has slumped 39%, Amazon has fallen by 37%, Microsoft is trading 24% lower and Apple is down 22%.
‘The UK has been relatively well-placed against the cremation of concept capital year-to-date,’ says James de Uphaugh, manager of Edinburgh Investment Trust (EDIN).
He is referring to the more speculative stocks offering what appears to be an exciting proposition today but no profits for years to come.
These types of stocks have fared even worse than the mega cap US names. For example, exercise bike group Peloton (PTON:NASDAQ) is down 61% year-to-date and electric vehicle specialist Rivian (RIVN:NASDAQ) has fallen by 76%.
In essence, investors were paying too much for US stocks and there has subsequently been a derating in the market. To make matters worse, many of the US mega-caps are saying their growth is slowing or there are challenges ahead, and investors are not happy.
In contrast, UK stocks have been cheap on a relative basis for the past six years because of all the uncertainties around Brexit and the idea that the FTSE 100 contained boring companies with none of the growth seen in the US.
There is now a realisation that UK stocks offer everything people want in the current environment – inflation and rising interest rate beneficiaries, and still relatively cheap valuations.
Even when markets calm down, there is a feeling that investors will pay more attention to valuation in the coming years than they have in the decade just gone. UK stocks could remain interesting even when global markets pick up.
At the time of writing, the CNN Fear & Greed index stood at ‘Extreme Fear’ with investor sentiment poor. While it’s impossible to say when the market will bottom out, it’s worth watching for signs of panic and desperation.
Capitulation means many investors losing patience on falling stocks and selling out. In theory that means all those who wanted to sell would have done so, leaving only buyers who will then drive prices up. And what do you think has been happening in the past three months? Widespread selling.
‘The definition of true capitulation is “investors selling what they love”,’ says Bank of America. ‘Apple is the poster child for the quantitative easing bull market and that stock is now in a bear market.’
Cryptocurrencies have crashed in recent weeks, which is another sign investors who lack patience are cashing in anything they can. Capitulation is arguably happening right in front of our eyes.