Bill Stone, the investment strategist at PNC Wealth Management, sees one reason for hope, given everything going wrong in the market today: There's more cash lying around now than during the last bear market.
While there is much discussion about the lack of liquidity within some financial companies, this is not for the lack of cash in the economic system. Our measure of household cash as a percentage of the stock market (S&P 1500) capitalization is currently above the levels of the end of the last bear market (September 2002). This underscores our belief that there is plenty of "fuel" for a rally once the extreme risk aversion fades.
Source: Bloomberg, Standard & Poors, Federal Reserve, PNC
There are some signs that we are seeing a climactic oversold environment.
- The percentage of stocks in the S&P 500 trading above their 200-day moving average is now below 20%. This is consistent with similar positive turning points.
- The CBOE S&P 500 Volatility Index (VIX)—a market estimate of future volatility—is above 36. This high level is also consistent with past positive reversals.
- Down volume on the NYSE was more than 18.5 times the volume on stocks with increasing price. Again this extreme condition is consistent with an extreme oversold condition.
In more normal times, those are the sorts of numbers we'd use to call a bottom in the stock market, and Stone notes that this much fright often raises the odds for a reversal. Right now, however, signs of fear in the market aren't exactly a surprise. In fact, given the current crisis, they may not be overreacting at all.