JPMorgan Chase: How a typical U.S. stock market correction finds its bottom

After the global risk market was "bloodbathed", has the worst period passed?

On August 5th, JPMorgan Chase analyst Thomas Salopek released a research report, reviewing the history of market bottoms, stating that the current market does not have a complete set of "bottoming signals", and the depth of the subsequent pullback may further deepen.

As of that day, Salopek believed that the current market has not yet shown complete bottoming characteristics. For example, the S&P 500 index has not fallen below the 20-day moving average, market breadth is not at an extreme low, and the put/call ratio has not risen to an absolute high.

Recession concerns accelerate market decline

The report indicates that there are three indicators showing that the market is declining: deterioration in credit spreads, steepening of the U.S. Treasury yield curve, and defensive sectors leading the rise.

Credit spreads refer to the spread between high-yield bonds and government bonds, reflecting the market's expectations of future default risks for companies. Once this indicator widens, it means that the risk of corporate bankruptcies is increasing, which is an important signal of deteriorating economic prospects.

Secondly, recession concerns have continued to boost rate cut expectations, thereby driving the steepening of the U.S. Treasury yield curve (long-term bond yields rising).

Lastly, defensive sectors led by utilities rising ahead often indicate profit declines in other industries, indicating economic slowdown and growth risks.

It's too early to draw conclusions

Previously released non-farm payroll data showed that the U.S. unemployment rate had soared to 4.3%, triggering the recession indicator "Sam's Rule", but JPMorgan Chase disagreed with this view.

The report pointed out that the surge in the unemployment rate was caused by an increase in labor supply, rather than weak demand in the labor market, which is actually a reflection of the labor market gradually returning to normal levels after the shock to labor supply during the pandemic, and cannot directly lead to the conclusion of an economic recession.

Previously, the proponent of "Sam's Rule" also expressed the same view, stating that considering the changes in the U.S. labor market today, Sam's Rule is somewhat ineffective and cannot prove that the U.S. economy has entered a recession.

Technical indicators have also not fully reflected bottoming characteristics.

Firstly, as of the 5th, the S&P has not fallen below the 20-day moving average. The report points out that once this level is breached, it means that the U.S. stock yield curve will invert, signaling the end of the cycle.

Secondly, the put/call ratio (PCR) has not reached higher levels, insufficient to support buying put options.

Thirdly, the "fear index" (VIX index) has not shown a reversal, indicating that the market has not yet bottomed. The report suggests that it is expected that when this index rolls back to about one-third from its peak to normal levels, it may signal the market bottoming out.

Finally, the report points out that the lower the market breadth, the worse the market situation. As of the 5th, the market breadth index of the Nasdaq index was 34%, which did not meet the 20% standard of JPMorgan Chase. Moreover, intense selling pressure often leads to more than 60% of stocks falling to short-term lows, a level the market has not yet reached.

In addition, the report notes that the AAII (American Association of Individual Investors) sentiment index is also a signal worth paying attention to. This index is based on weekly data, with the next observation point scheduled for August 8th