Yesterday the stock market dumped and the Nasdaq closed below its low of last week, which has been its key support level, to make a lower low. This constitutes the second sell signal the stock market has given us this week. On Tuesday I got a sell signal on both the Nasdaq and the S&P 500 when they failed to make a higher high.
That was a warning and it came just after the S&P 500 registered its second highest valuation in fundamental terms in its entire history.
Now that the Nasdaq’s second sell signal acts as confirmation and marks the start of a downtrend corrective wave in the markets, which are marked by something making lower highs and lower lows. I suspect it will play out slowly and over several months. But, here is the chart.
The next real support level is in the area of the 150 and 200-day moving averages, although we could see a bounce off of the 12500 area first before getting there.
What happened yesterday is that the market tried to bounce into lunchtime as Federal Reserve Chairman Jerome Powell gave a live video interview with some reporters from the WSJ. It started with a speech and then a Q&A.
There were hopes among some that Powell would address the rise in rates in long-term bonds, which has been hurting the stock market lately, but when the reporter asked him if the Federal Reserve plans to take action he said no.
The market ticked down quickly after his answer and I saw the reporter try to ask him again. My thought in my head was stop asking dummy, but he did it again! And Powell said no once again and the market completely cracked. It really wasn’t the reporters fault, Powell wasn’t doing anything now anyway.
During the remarks Powell also said that he expects inflation will pick up in the coming months as the economy opens back up and then he says it will just go away. He calls it transitory.
But has inflation ever worked like that? Has it ever just came and went over a few weeks? Real estate prices are going up and up and a lot of the wealthy have been sitting piling cash savings ready to spend while the Federal government’s deficit is exploding. There are a lot of credibility problems in what Powell says, but he is trapped as he can’t be alarmist over inflation or people will start to ask if he is going to raise rates, which would destroy everything. He is sorta pretending that everything is ok, or he has fooled himself into thinking that, because by the end of the day both the TLT Treasury bond ETF and the LQD corporate bonds ETF sold hard.
Don’t expect the market to bottom until LQD stops falling as falling bond prices drag stocks down. And it’s going to take Fed action for that to happen.
So, that’s where we are.
At the same time, the VIX barely went up yesterday, considering the action in the markets, which demonstrates that there is little fear in the market despite what is happening. It got higher at the end of January than it has gotten now. Generally speaking, people don’t really panic in the market until it falls at least 10%. However, the real level that can trigger selling panic is a decline from a high past 15% as that causes people on margin to fear coming margin calls on their account and we hit record margin debt in this market in January. That’s why 20% is often the end point for serious corrections.
That margin debt record happened about the same time the Gamestop hit the news cycle and people got fascinated with Bitcoin going above $50,000. In hindsight it looks like we saw a surge peak in speculative euphoria in the financial markets. I’m sure in recent weeks you saw some of the crypto people appear on Facebook and Twitter full of hubris pounding their chests, even mocking people not believing in it like they do, even though one day central banks will likely destroy it. Whenever the stock market has a correction Bitcoin completely crashes, so if you are feeling some pain in stocks be glad you are not in virtual crypto currencies!
There are pockets of positive action against the markets, such as in energy and real estate, I’m hopeful that we will get some sort of short-term bounce soon. Do not despair, corrections don’t last forever and lead to great buying opportunities.
During the day around 2PM yesterday, I did a live trading session in which I discussed the markets with David Skarica of addictedtoprofits.net.
If you have any thoughts you’d like to share or questions scroll down to the bottom of this post to the comments section.
-Mike
