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After both the S&P 500 and Dow Jones completed their worst week since 2020 on Friday, markets could be primed for a corrective rally when trading reopens on Tuesday after the Juneteenth holiday. Though the narrative is filled with gloom and doom, and longer-term investor expectations seem to be extremely negative, stocks don't tumble in a straight line. Therefore, we're anticipating a short-term rebound within the longer term downtrend.
Over the past 11 weeks, the SPX registered its 10th decline as it entered a bear market. The broad benchmark is down 24.5% since its Jan. 4 all-time high, sinking below the accepted -20% level considered to be an 'official' bear market indicator.
Why then are we predicting a possible bounce as early as this coming week? When broad sentiment is highly bearish, it increases the likelihood that whoever wanted to sell has already done so, leaving demand in charge. Technicals are helping confirm this:
The S&P 500 achieved the minimum implied target of its H&S top. The index dropped 5.1% and 5.75% in the previous weeks, respectively. The benchmark is also 4.7% above its 200-week MA, which means there is still room for another, similar weekly decline.
Note, too that significant support such as this often reaches beyond its strict location as traders try to beat each other to the punch. There could, therefore, be another weekly decline before a likely rebound, if we don't experience a short-term bounce this week.
Significantly, the decline of all 11 S&P 500 sectors simultaneously during the past week demonstrates the aggressive nature of the fall, which also primes the index for a rebound.
As well as on a weekly basis, all 11 sectors are lower over the previous month and the past three months. The single bright spot is the Energy sector which has been up over the previous six months. The remaining ten sectors are deeply in the red, with Utilities and Consumer Staples down the least and Consumer Discretionary, Communications Services, and Technology shares taking the brunt of the sell-off. The yearly view echoes the 6-month view.
The S&P 500's entry into a bear market means it's joined two other major US indices already in a slump—the tech-heavy NASDAQ 100 and the small-cap Russell 2000, down 34.2% and 32.25%, respectively.
Similar to the S&P 500 more recently, the NDX reached the implied target of its H&S top and is about 4% above its 200 WMA, after coming within 2% of this key weekly average during Friday's session low. The NASDAQ 100 gained on Friday, after having dropped 34.2% from its Nov. 22 all-time high on Thursday, its weakest level since Sept. 24.
The Dow Jones Industrial Average is the only major benchmark that has not yet shown a reversal pattern since its downtrend began. The 30-component blue-chip index may yet show more weakness, as there appears to be no demand on the technical chart to offset supply in order to create a range.
As well, the Dow weakened even further when the index fell below its Falling Channel on Friday, suggesting a steeper descent ahead.
However, the DJIA is the only major US index not yet in a bear market, though it's just a whisper away from that designation. On Friday, the index fell as much as 19.7% intraday from its Jan. 5 all-time high, dropping to its lowest point since Dec. 1, 2020. The price rose 1% from its 200 WMA and closed 2% above it.
The second worst performing major US index after the NASDAQ 100 is the Russell 2000. While technology stocks have been sold off, as more expensive money—via interest rate hikes—makes their total valuations too expensive, small cap domestic companies are at a disadvantage to multinationals which have the stronger possibility of continuing to grow profits despite rising interest rates.
As of Thursday's low, the small-cap gauge registered a 32.35% loss from its Nov. 8 all-time high, erasing all gains since Nov. 2020. The Russell 2000 is the only index that has already fallen below its 200 WMA. It's gapped down and dropped right through it.
The current Fed QT cycle pressures technology and small-cap shares equally. This positive correlation was visible Friday, when both the NASDAQ 100 and the Russell 200 gained.
Along with the fact that technically, stocks are poised to continue lower over the long term, within their downtrend, the Federal Reserve has indicated there will be continued tightening ahead. Indeed, this past Wednesday, the US central bank hiked rates by 0.75%, the most significant increase since 1994.
Bottom line: many of today's investors have never had to operate within a tightening economy and a significant number have been spoiled by QE when lower, or even steady rates ultimately turned into what seemed like an unending equity dip-buying opportunity.
Clearly, that's already changing.
Treasury yields, including for the 10-year benchmark, also pushed higher, touching their highest levels since 2010 midweek. Rates on Friday closed well off the weekly high, but at the highest levels since 2018.
That movement created a powerful Shooting Star, whose upper shadow is exceptionally long, showing how far back yields fell. Given that yields and their underlying bonds possess a negative correlation, it means that bulls pushed back a bearish advance.
Falling yields should ease the pressure on stocks, at least over the near term, reinforcing the case for the short-term equity bounce we discussed above. Still, in the longer term, the trend for yield is higher. Recently the 50-Week MA crossed over the 200-Week MA, triggering a weekly Golden Cross. The first time that happened was during Aug 2017, when yields surged nearly a whole percentage point in just a month.
The dollar rose for a third week to its highest weekly close since December 2002. At the same time, gold fell, ending a two-day rally.
The precious metal was lower for the week as well, sinking below the 200 DMA. In addition, the 50 DMA crossed below the 100 DMA.
The price is still trapped between the rising trend line since the March 2021 low and the falling trend line since the March 2022 high. We're betting on the longer trendline prevailing, which would push the yellow metal higher through its downtrend line.
Bitcoin has dropped toward $18,000 after breaking below $20K on Saturday.
The cryptocurrency is now at its lowest point since December 2020, after having dropped last week below its 200-week MA, after finally completing the double top we've been forecasting since the start of the year. We now expect Bitcoin to plummet below $10,000.
Oil plunged to $110, down 6% on Friday for the commodity's sharpest daily loss since March. The sell-off came after the Federal Reserve's hawkish interest rate increase which has left investors jittery about a recession that could hit energy demand. Also, the stronger dollar makes oil more expensive.
Oil gapped lower on Friday, wiping out five weeks' worth of gains and completing a powerful weekly Evening Star, which will challenge the preceding Symmetrical Triangle.
All times listed are EDT
21:15: China – PBoC Loan Prime Rate: was previously set at 3.70%.
11:00: Eurozone – ECB President Lagarde Speaks
21:30: Australia – RBA Meeting Minutes
8:30: Canada – Core Retail Sales: predicted to plunge to 0.6% from 2.4%.
10:00: US – Existing Home Sales: expected to slip lower, to 5.39M from 5.61M.
2:00: UK – CPI: seen to edge up to 9.1% from 9.0%.
8:30: Canada – Core CPI: probably edged lower to 0.4% from 0.7% MoM.
10:00: US – Fed Chair Powell Testifies
3:30: Germany – Manufacturing PMI: expected to slip to 54.0 from 54.8.
4:30: UK – Manufacturing PMI: seen to hold at 54.6.
4:30: UK – Services PMI: forecast to remain at 51.8.
8:30: US – Initial Jobless Claims: anticipated to dip to 225K from 229K.
11:00 - US – Crude Oil Inventories: previously printed at 1.956M bbl.
2:00: UK – Retail Sales: to fall to -0.9% from 1.4% MoM.
4:00: Germany – Ifo Business Climate Index: to edge down to 92.9 from 93.0.
10:00: US – New Home Sales: expected to come in lower, at 585K from 591K.
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