Wall Street has finally come around to the understanding that when the Fed told us they were going to shift from a policy of massive accommodation…to one of tightening…that also told us that their safety net had been moved lower than it had previously been. In other words, as we said for most of the past few months, the “Fed put” is now further “out-of-the-money” than it used to be.
The question now is just how far below current levels that new level now stands. The Fed meets this week…and they’ll have their usual post-meeting announcement on Wednesday afternoon…which will be followed by the Chairman’s press conference. At that point, we could get some more clarity on this issue, but it’s a good bet that the “further clarity” still won’t be very definitive. So, although we could get a bounce in the stock market at any time, the line of least resistance is likely to be lower in the months ahead.
Firday’s sell-off came on much higher volume…and the number of stocks hitting 52-week lows came in at 525. Of course, the higher volume could have been due to the expiration on Friday, but that would have been out of the ordinary…given that it was not a “quadruple witch” expiration. In other words, there were SOME signs that we had a bit of capitulation on Friday…..No, this was nowhere near the kind of capitulation/washout that we see at a major bottom, but it might have enough to indicate that a short-term bottom could take place quite soon. It is very, very rare that a correction (or a bear market) takes place in a straight line…so we would expect several relief rallies along the way. If history is any guide, those bounces will be quite sharp.
That said, it sure doesn’t look like the bounce is going to come this morning. Even though the futures were trading higher after last night’s incredibly exciting Bills/Chiefs football game, they were lower by the time we woke up this morning….and they’ve moved even lower as the morning has progressed………As we mentioned in our weekend piece, the next support level on the S&P 500 is 4,300. That was the low from early October…and it would take the S&P into official correction territory of -10%. (How the -10% level ever became the definition of a correction, we’ll never know. That certainly was not the case when we started on Wall Street. We would say that the 8% decline in the S&P, the 14% drop in the Nasdaq and the 18% decline in the Russell 2000 ALREADY equates to a correction.)
However, a drop of 10% will still give us plenty of headlines. However, whether a drop of 10% in the S&P 500 qualifies as a correction or not doesn’t matter…as it will entail a drop below 4,300 and thus it will still be very important. As we stated above, the 4,300 is also where the October lows come-in. The S&P 500 has already fallen below its trend-lines from the November 2020 election and the trend-line March 2020 lows. A drop below the October lows would mean that the broken trend-lines were followed by an important “lower-low.” THAT would confirm a significant change in the intermediate-term trend for the stock market.
In other words, the 4,300 level is the “line in the sand” for the stock market. Therefore, if we break that level in any meaningful way (either this week…or after a short-term bounce), it’s going to signal that the stock market is going to fall a lot further before we see a sustainable bottom. (First chart below.)
Having said all this, we want to go back to what we said at the very beginning of this morning’s piece. We ARE seeing a few signs of a mini-capitulation move. It might not be the kind of wash-out move that signs THE bottom for this decline, but it could easily be something that give us a relief rally soon.
We’d also highlight that both the XLK technology ETF and the SMH semiconductor ETFs are testing their 200-DMAs…AND are both getting oversold on their RSI charts. If you look at the stock market declines in 2018 and 2020, the 200-DMAs were broken in a significant way eventually, BUT they both tried to hold their 200-DMA’s on their initial test. In other words, the short-term oversold condition of the tech stocks is another reason to think that the stock market could see some sort of bottom at some point this week…even if the bounce only lasts for a week or two………..In other words, short-term traders are going to have to stay very nimble this week. (Second & third charts below.)
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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