The S&P 500 Death Cross Is Not As Scary As It Sounds
The week ending Mar. 18 may turn out to be one of the most critical weeks of the year and one of the most pivotal. The Fed is expected to raise rates on Mar. 16 by 25 bps marking the end of the zero interest rate policy and the start of a tightening cycle. The market is only pricing in a 33% chance of the Fed raising rates to 175 to 200 bps by the end of 2022.
We may find that by the time this meeting is over, the market’s expectations are too low, and those odds should be much higher, especially if some of the commentaries from Fed governors over the past few weeks turn out to be correct.
In this week’s Tactical update, I indicated that based on Jay Powell’s commentary when he testified before Congress, it sounded as though he was looking to raise rates by 25 bps at every meeting this year.
Financial Conditions
Financial conditions have already started to tighten, and what is surprising is that conditions today are as tight as they were in December 2018. The only difference was that in December 2018, the Fed was about to go from a path of tightening policy to easing policy. At this point, there is no sign of the Fed reversing course, so financial conditions may only grow tighter.
Liquidity
As liquidity becomes less readily available, we see the book’s depth on the S&P 500 futures thin out, causing the spread between the bid and ask to widen. It is causing an increasing amount of Intraday volatility in the markets.
It isn’t just in equity futures were seeing the effects of the Fed aiming to tighten monetary policy, but also the results of the Fed no longer supplying QE to the markets. The depth of the book for the 10-year Treasury futures has evaporated too.
With the Fed no longer supporting and easing financial conditions, I suspect these liquidity issues will only grow worse, and volatility will grow more intense in the weeks ahead.
1. S&P 500 ETF
On Friday, the S&P 500 ETF—SPDR® S&P 500 (NYSE:SPY) appeared to have confirmed another double top pattern. But this time, the ETF was heading towards the lower end of the consolidation triangle.
But once that breaks, it should lead to the indexes making a series of lower lows, beyond the Feb. 24 low around $410, by potentially moving another 7% lower.
2. NASDAQ ETF
The Invesco QQQ Trust (NASDAQ:QQQ) has already broken down and fallen out of their consolidation triangle, projecting a decline to around $300.
3. Apple
On Friday, I noted that it seemed as if the market had shifted its attention to some of the large-cap names, one of those being Apple (NASDAQ:AAPL). The shares have firmly broken the uptrend that started in June and seemed to be on their way below $149.
4. Advanced Micro Devices
Advanced Micro Devices (NASDAQ:AMD) continued to exhibit signs of weakness. The stock continued to head towards support at $100, and once that level breaks, there would be an excellent chance it runs back to $89.
5. Twilio
Twilio (NYSE:TWLO) continued to drop and was close to filling the gap at $120.
6. Adobe
Adobe Systems (NASDAQ:ADBE) has a big earnings announcement coming on Mar. 22, which, given DocuSign's (NASDAQ:DOCU) result, appearsed to have the market feeling a big nerve.
On Friday, the stock fell 5% and made its lowest close since June 2020. There was a good chance this one traces back to $390, if not lower.
7. Boeing
Boeing (NYSE:BA) was getting closer to filling the gap at $155.
