This week’s commentary is going to be short and sweet – well, ‘sweet’ is still up for debate.
Last week, I went into extensive detail on what I am noticing and paying attention to. We are in quite a precarious situation here stateside, but there is a far more precarious situation in developed Europe and parts of Asia and Africa. I believe that they are on the cusp of some very painful times when it comes to their economies trying to recover, yet they are faced with skyrocketing oil and agriculture prices without internal economic growth to support being able to withstand these price increases. I read on Monday that there were two countries that have nighttime curfews to help aid against “food riots.” Crazy to think, that people are rioting due to a lack of food and the inability to pay these price levels for the food.
I have been pleased that the market has mostly traded in line with expectations over the past month or so. The equity markets are truly in a quandary, vacillating in a fairly tight range between 4400-4700 while trying to deal with an incredibly quick spike in interest rates and higher commodity prices. The S&P 500 fizzled out almost perfectly on cue as the S&P 500 entered the 4600-4700 resistance zone. Since then, the anticipated pullback has shed around 5% off the S&P and 7-8% off the NASDAQ 100 and Russell 2000, as we’ve returned to a weaker market where less has been working. However, we have now reached a point where the market is going to have to make a decision. With the continued selling Monday, the index has now fallen into this 4400-4450 area and is threatening to break below it.
A bounce needs to happen almost immediately to prevent such a breakdown and help confirm that the recent weakness has just been a normal dip in a broader uptrend. If not, stocks break down further from here. The market doesn’t seem to be exhibiting the same kind of violent severity that we saw at times in January and February. That can obviously change very quickly, but I am still holding out some hope that we can get another bounce attempt soon, especially since sentiment globally appears to be turning more negative again. If a bounce does happen, how far it extends will then tell us a lot about where to expect the next move. If it stalls out below the March highs, then we may, indeed, need to be on the lookout for another test of the 2022 lows.
I would prefer to see a higher high made, even though I still believe the S&P will have trouble getting too far above 4700 - for now with all the inflationary pressures that have been the market’s nemesis so many times in the last number of years. Yet, getting up around there would at least put more distance between stocks and their lows for the year and may calm the waters a bit.
In short, nothing has really changed with my broader expectations. I still think the likeliest path, for now, is going to be a large, frustrating trading range with a lot of back-and-forth action. The market is not overvalued any longer and the bloom has clearly come off many roses in the big growth names that have been enjoyed for so long. Rates continue to skyrocket and put pressure on many areas of the financial markets. The benchmark 10-Year U.S. Treasury yield has now gotten up almost exactly to the major 40-year trendline I have noted before (see 10-year chart) and if this line can’t produce at least a pullback in rates, I am not sure what it will take. If rates blow through this line and keep pushing higher, things may start to break. I find it interesting that on Tuesday, just when some hot inflation numbers for the CPI (consumer price index) came out, the meteoric rise in these 10-year interest rates decided to take a rest. Could it be that the inflation spike is at a high point, at least temporarily? Stay tuned!
Just to leave you with one last picture, which doesn’t need a lot of words, here is the current S&P 500 chart. As can be clearly seen, the lows in March sort of retested the lows of last May. The lows this week make one wonder if we are going to hold those lows (as I mentioned above) or move lower. Seems to me like the news is about as bad as it gets. Now it is up to companies to come out with earnings and projections of future earnings to give us some insights into different industries in the coming weeks. Again, as I said above, stay tuned!
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