Many times this year, we have said the next few days were going to be very important as to how the next few weeks were going to playout in the stock market. No, we have not been the “boy who cried wolf.” Most of those examples have indeed been important. Many times, the poor performance of the market at those “key junctures” has led to further declines in the stock market. Other times (like in late-January and mid-March), it was followed by nice rallies.
We’re facing another one of these “key junctures” once again this morning. We’ve seen a nice “set-up” for a further rally over the past two trading days…but we got some bad news last night that could throw a big wrench in the works……The “set-up” we’re talking about was the strong late-day bounce last Friday…that was followed by a strong rally yesterday (which included another late-day rally). All of this took place after the S&P had tested (and held) the important 3,800 support level that many technicians have been talking about recently. The fact that the market had acted quite well have a positive test of an important support level gave investors some hope that the tradable bounce that so many people were looking for a couple of weeks ago…was finally going to come to fruition (albeit from a much lower level).
HOWEVER, after the close last night, SNAP announced that it was cutting its revenue forecasts significantly. This has knocked the stock down by 30%...and is dragging down the shares of other social media stocks with it. The reasons for the slash in forecast had a familiar ring to it. They blamed rising inflation, supply chain issues, labor issues, the war in Ukraine, etc. In other words, the problems they are facing are not unique to SNAP…nor to the social media industry either. Therefore, it is raising concerns that a lot more companies will be slashing guidance in the days and weeks ahead. That, in turn, would lead to the kind of decline in 2022 earnings estimates that we have been warning about for months. As those earnings estimates come down, the P/E ration on the S&P 500 will rise…which means that after the sharp decline we’ve seen so far this year, the market is not becoming as cheap as many people have been thinking. Sure, it’s cheaper than it was in January…but it’s not trading at the 17x multiple that $228 consensus estimate for the S&P this year would indicate.
The question now is whether the stock market is oversold enough to shake-off this bad news and bounce back quickly. As we highlighted yesterday morning (and over the weekend), the S&P 500 has only been more oversold one time since the financial crisis (back at the March 2020 pandemic lows)…and the NDX Nasdaq 100 is not been more oversold since that crisis. Therefore, even thought the futures are trading lower, it might be able to bounce back quickly over the next day or two. (We realize that this doesn’t make any sense whatsoever to those who write the textbooks, but after well over 30 years in this business, we know short-term moves in the marketplace can be MUCH different than what “should” happen based on the fundamentals.)
Don’t get us wrong, the odds that the stock market will be able to shake-off this bad news are less than 50-50…but they’re still better than most people are thinking this morning. If the market is able to bounce-back strongly today or tomorrow, it is going to catch a lot of people offsides…and it will give the markets a surprising rally as we go into Memorial Day weekend…..If, however, this morning’s sell off in the futures accelerates throughout the day today…and takes the S&P 500 below that key 3,800 support level…it’s going to be incredibly bearish. It could/should be the kind of decline that causes many people to throw-in the towel and get out of the market. (Remember, the 1987 crash was not just about “portfolio insurance.” Mutual fund redemptions were JUST as important…and these two issues fed off one another. “Forced selling” can come in many forms…and mutual fund redemptions is one of them.)
Which way is it going to playout over the near-term? We’ll let the stock market tell us the answer to that one. We’ve been saying for quite some time that the 3,800 would only provide short-term support. (We just thought it would last for more than two days.) We have long said that it would see lower-lows eventually…..However, we do believe that it is still possible that the 3,800 level will indeed create a short-term bounce…and it could even come without a retest of that level. That said, today’s action is going to be very important when it comes to this situation. “Shaking off” bad news is one of the most bullish developments the markets can experience. If that doesn’t happen over the next day or two, things are likely going to get very, very ugly…very, very quickly.
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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