Stock Market Crash: 5 keys to decoding this market

Coronavirus is spreading, oil futures are plunging, the Fed trying yet again to buoy the economy—it’s no wonder markets have been riding a proverbial rollercoaster this week.

As the Dow and S&P 500 both plunged over 7% in trading on Monday (triggering one of the market’s circuit breakers that halted trading for 15 minutes), it’s clear investors are rattled. And a rally that saw the Dow and S&P 500 up almost 5% on Tuesday only illuminates how volatile the current market is. But amid all the apparent panic and uncertainty, here are five things analysts are watching this week.

A slowdown is already priced in

Whether or not analysts are crying the “r” word just yet, investors have already priced in a slowdown in the economy, according to Allianz Investment Management’s Charlie Ripley.

“We’re near that inflection point,” Ripley says, where “it doesn’t feel like we’re heading into a recession, but at least we have a slowdown that’s been priced into the market.”

Ripley sees this period of uncertainty, prompted largely by the continued (and widening) spread of the coronavirus, as being a central reason why we’ve seen such intense sell-offs. How the virus will impact the economy (and its strength, which, until the virus broke out, was actually quite sturdy), is an environment where “We tend to see nervous investors seek safety, and that’s essentially what we’ve been seeing in the last week or so. Maybe a bit over exaggerated in [Monday’s] move.”

Plus, a Fed rate cut of 50 basis points last week is looking like a weaker and weaker bandage. Charles Schwab’s Randy Frederick notes that the markets are already pricing in another 50 to 75 basis point cut next week—”Clearly there are many signs out there telling us a recession is likely,” he says.

Valuations are more attractive, but…

It’s been a long time since valuations were considered “cheap.” But at a time when markets are dipping into a correction, putting many of the biggest names “on sale,” valuations have come back down to earth a bit, analysts say.

In fact, they’ve “improved both on an absolute (lower [price to earnings ratio]) and relative basis (the difference between the earnings yield and treasuries has widened, increasing the favorability of stocks relative to bonds),” Wells Fargo Investment Institute’s senior global market strategist Sameer Samana tells Fortune in a note. “But it’s also worth noting that the earnings outlook has also been dented a bit,” he adds.

That earnings outlook is the key caveat here. In the past several weeks, dozens of companies have announced coronavirus may impact their earnings, or have even suspended earnings guidance. As Frederick points out, the “E” part of the P/E ratio (price to earnings) is often forward-looking—which means it’s basically an estimate. Given that so many companies are uncertain of the impact of the virus on their earnings, things may only appear cheap for now.

“If earnings estimates hold up, then valuations have come down. But frankly, I think if valuations are low right now, it’s only because we haven’t seen all of the wrath of downgrades that are probably yet to come,” Frederick says. That’s why he is cautioning investors not to buy simply because valuations look attractive.

Support is low, and retail investors are growing bearish

The S&P 500 is down about 7% since last Wednesday, but its precipitous dive has some worried that support levels (the bottom level off of which prices usually bounce on a 200-day moving average) are weak.

Wells Fargo’s Samana, for one, thinks “it’s a little disappointing as to how little support the S&P found at the 200-day moving average and is now trading below it, which will make it overhead resistance on the way back up, and should make any recovery slow and steady (as opposed to sharp and V-shaped),” he tells Fortune in a note.

Even if a recovery might be more slow and steady, we’re also seeing “extreme” levels of bearishness by a key group: retail investors. Schwab’s Frederick notes that recently, put-to-call ratios on options are “hitting what I call ‘extreme’ levels.” He notes that call options (those that are betting stocks will go up) typically outweigh put options (those betting stocks will go down). That ratio is typically 60-70 puts for every 100 calls, Frederick says.

But on Monday, that number hit 120 puts, he notes. Per CBOE market statistics, the total put/call ratio was 1.83 on Monday—and you “very rarely see that [ratio] go over 1,” Frederick says.

“That is extremely high,” he notes. “You just don’t see that very often.” That means investors (many of which are retail investors) are exceptionally bearish right now.

Volatility is off the charts

It’s no secret markets are volatile. Watching the Dow on Tuesday is a case in point, with a stunning V-shaped drop and recovery to close. But volatility is the new status quo, says Schwab’s Frederick.

In fact, “We’re experiencing what I would call the classic definition of volatility. Volatility means movement, it does not mean movement in a particular direction,” says Frederick.

Last week, multiple down days were followed by multiple up days, and on Tuesday, markets plunged back into the red briefly before closing up over 1,100 points higher for the Dow.

For Allianz’s Ripley, who is watching the Cboe Volatility Index, or the VIX index (which tracks fear on the Street), “seeing it spike to levels we haven’t seen since the [2009] crisis is something important to watch.”

The VIX has hit (and stayed in) the upper 40s for roughly a week, meaning investors see a high likelihood that markets will be volatile (whether up or down) moving forward. In the past, there have been periods when the VIX hit high levels and stayed there, notably during the 2008 financial crisis.

And for some like Schwab’s Frederick, an elevated VIX might be here to stay given the current backdrop of the coronavirus.

“The VIX is ultimately going to stay elevated for the same reason the market is in this high volatile period, because this is one of those unknown issues. We just don’t know how long this outbreak is going to last,” he says.

The markets are oversold

From a technical standpoint, it’s clear the markets have been oversold many times in the past few weeks.

(The S&P 500′s relative strength index, or RSI, hit around 28 on Tuesday, up from as low as 19 a couple weeks ago. Readings below 30 suggests oversold conditions).

Indeed, we’ve been oversold many times in the past week or two, says Schwab’s Frederick, but that’s no time to jump back in and bargain-hunt. “You’re going to get temporarily oversold periods throughout this timeframe, and this could last another two or three weeks for all we know. You will have bounces, but then the bargain hunters step in too soon, we’ll get temporarily overbought. I’ve been cautioning people not to jump in and do any buying just yet,” Frederick cautions.

Yes, there’s plenty at play in the current market, but one thing seems to stand out among the rest for analysts:

“There’s an old football saying from many years ago that says, ‘winning isn’t everything, it’s the only thing.’ Right now, ‘coronavirus isn’t everything, it’s the only thing’.” Frederick asserts. “That’s kind of the way I’d put it.”