BTIG: Bulk of the bounce is done, durable market bottom still ahead

The market rout from a week ago triggered some tactical buy signals, leading to a recovery in stocks over the following days, clawing back of the week’s losses.

However, strategists at BTG believe that the “bulk of the bounce has likely run its course,” advising investors to use the momentum toward’s S&P 500’s (SPX) 5400-5440 range to lighten exposure.

“A final durable low is likely still ahead of us, in our view,” strategists said in a Sunday note.

“We are hard pressed to find a 5%+ SPX drawdown that ended without seeing a breadth washout (less than 20% of components above the 20 DMA). It only got to 31% last week, so unless it's different this time, we should expect another leg lower to fully washout breadth.”

BTIG also points out that market sentiment remains mixed, with put/call ratios returning to levels last seen in April, which is a positive sign. However, the NAAIM exposure index, which tracks the average stock market exposure of active investment managers, is still elevated, exceeding typical levels observed during market washouts.

On the sector front, consumer stocks continue to show broad weakness, while defensives are consolidating near their highs.

BTIG maintains a favorable outlook on real estate investment trusts (REITs), noting their ability to hold at the breakout point, but it views homebuilders as vulnerable as long as they stay below key resistance levels.

As for small-cap stocks, the investment bank notes that iShares Russell 2000 ETF (IWM) remains below the key resistance level of $210, advising caution until that level is reclaimed.

Meanwhile, gold appears well-positioned for a next leg higher, with GLD (NYSE:GLD) ETF consolidating while testing the $225 level for the fifth time in recent months. “A breakout seems imminent in our view,” strategists said.