The market could well resume its downward spiral, but we may have reached a little-seen pivot point that culls out the best performers, which no longer keep falling and indeed will rise. That’s the take from SunTrust Advisory Services.
The concept here is called an “internal low,” according to Keith Lerner, the unit’s chief market strategist. This means that, after the initial market crash that took down almost everything starting in February, certain strong players start to show their mettle.
This phenomenon “occurs when the intensity of the selling pressure as well as fear and indiscriminate selling reach a crescendo,” he wrote in a research note. “While the overall market index may continue to decline, the movement of stocks within the index become less synchronized.”
And at such a stage, the sturdier stocks pull away. “Once the internal low is passed, there tends to be greater differentiation among stocks within the market,” he explained. “Investors start to separate the wheat from the chaff.” From here, he wrote, “We now expect more of a two-way market, as we move past the peak of indiscriminate selling.”
To be sure, no mathematical precision is attached to this observation. Still, he went on, “Longer-term investors should not be waiting for an all clear or a bell to ring at the market bottom. The question is, will longer-term investors be rewarded at current levels? We believe the probabilities suggest the answer is yes.”
A couple of examples cement the idea of an internal low. Last week, the S&P 500 slid 2.1%—a big improvement from the wipeout that began February 19, when all seemed lost, and ended March 23, with huge rescues from Congress and the Federal Reserve in place.
But at the same time, last week featured solid performances from companies known for their enduring business models, robust cash flows, and strong balance sheets. Although Lerner didn’t cite them, these included cut-rate retailer Dollar General (up 14.8%), food maker General Mills (9.8%), and wireless titan Verizon Communications (3.3%).
Certainly, no one can say that the broad market has reached its low point. And the anguishing weeks expected ahead, of more coronavirus cases and more deaths, suggest that stock investors haven’t fully priced in all the horrible news.
But Lerner argued that reaching an internal low is a precursor to the overall market’s eventual nadir, which is not always near at hand. One instance of that, he declared, was the popping of the dot-com bubble. Back then, he wrote, “the internal low in the market occurred in July 2002.” Yet the rock-bottom for the market in that cycle was three months later, in October.
By the same token, he continued, the internal low during the global financial crisis came in October 2008, just one month after the collapse of Lehman Brothers, the inciting incident for the crash. The market as a whole, though, didn’t hit its lowest level until March 2009. And, Lerner added, “there were plenty of good buying opportunities in individual stocks before that.”
For those worrying that we are in for a prolonged market plummet, as happened after the 1929 crash, this all is reassuring. “Following an internal low,” Lerner said, “many individual stocks will have already bottomed ahead of the overall market as investors sought out the winners and losers.”