Not a great day for stocks with the S&P 500 falling by 2% and the Invesco QQQ Trust (NASDAQ:QQQ)s dropping 2.8%, even the Russell fell by 2.25%. The drop is all about the reality of last week now settling in, which centers around the Fed. The market is now adjusting to a Fed that will be removing QE over the next few months and, based on projections, could begin to tighten rates before the end of next year.
All you have to do is look at the big move higher in the 2-year, which was trading at 30 bps. That says it all there. The further it rises, the more painful it will be in the stock market. The market now will need to reset to a tighter Fed, and given where valuations are, it could be significant and unpleasant.
More importantly, the market may even grow concerned that the Fed is taking away QE as the economy slows, and that could become an all-out rejection of the Fed’s desire to cut back QE, creating a showdown similar to that of 2018. Except for this time, the market has to think about inflation concerns too.
Add to that what could be an earnings downgrade cycle, which has now started to show its head from companies like FedEx (NYSE:FDX) and Nike (NYSE:NKE). Now you can throw in Micron too, which gave guidance that was much lower than expected. Suppose earnings estimates start turning more down and the PE multiple starts dropping. This creates a very painful experience as the market will need to fall faster than earnings revisions to bring the PE ratio down.
VIX
It seems crystal clear that last week’s rally was a complete illusion driven by the crush in implied volatility. That did not happen Tuesday, at least; the VIX jumped by 24% to finish at 23.2, which, based on yesterday's close, is probably too low, and why you probably did get that end of implied crush. So there is plenty of room for the VIX to push higher if these drops in the S&P 500 continue at this pace.
S&P 500
It would appear that the S&P 500 started its wave 3, and if that is correct, then the drop is far from over and could have a lot further to go based on the size of wave 1. For now, I’m watching for a dip to 4,320, with the potential of it dropping to 4,240.
Micron
Micron Technology (NASDAQ:MU) gave pretty bad fiscal first-quarter guidance. The stock was trading down on Tuesday to around $70. It needs to break $69 to see more downside. Based on the weak guidance, I think it would break $69, setting up a drop to $58.
AMD
Advanced Micro Devices (NASDAQ:AMD) was destroyed, falling nearly 7%, and back to support at around $101. A break of support sets up a drop to $94.50.
Alphabet
Alphabet (NASDAQ:GOOGL) fell nearly 4% yesterday and, more importantly, fell below an uptrend that started in January. There was some support around $2,570.
