Investors Have More Reasons To Sell

December’s sharp increase in stock market volatility favored even more in 2022 but it reached new extremes last week. The decline on Monday of almost 3% led to more selling on Tuesday but then surprisingly the S&P rose 2.57% on Wednesday. Hopes for even more gains did not last as stocks were lower the rest of the week as the latest CPI report did not help.

It has been a rough two months for investors as things have only gotten worse in March. The sort of bidding war on how many rate hikes it would take to corral inflation started in December when some were looking for three hikes in 2022. By January Goldman Sachs was looking for four rate hikes with Bank of America looking for seven in early February.

Later in February JPMorgan raised the bid to nine rate hikes by March 2023. This was all before the sharp spike in crude oil prices and Russia’s invasion of Ukraine. These events have slowed down the rate hike bidding war which I feel did a disservice to many investors.

Do I think eight or nine hikes is likely? No, but in analyzing the economy and stock market one needs to accept that anything is possible. My point is there is no way to tell in advance but the ever-escalating worse case number of rate hikes is dependent on possible future, not current data. These discussions can influence average investors to act emotionally which is never a good idea. Often a large bank’s opinion is held in higher esteem by some investors.

It is not surprising with the invasion of Ukraine and soaring crude oil prices that investors have become less positive on the stock market and economy. The weekly chart of the S&P 500 shows that despite the 2.9% decline last week it is still above the three week low at 4114.65. On a break of this level there is next strong support in the 3950-4000, line a.

The S&P 500 Advance/Decline line has dropped further below its EMA this week and has next good support at last summer’s lows. In last week’s survey by the American Association of Individual Investors (AAII) the bullish % dropped to 24% last week but is still above the February 16^th low of 19.2% (point 1).

The survey of investment newsletter writers revealed that the ratio of Bulls/Bears dropped below one as it did at the 2020 and 2018 lows. These low levels of bullishness is a positive sign for the market as similar past readings have corresponded to correction lows in the stock market.

The NAAIM Exposure Index dropped to a low of 30.30 a week ago (point 3) and rose slightly last week to 42.58. It dropped to below 20% at the March 2020 lows, point 1, before it turned higher. By early April 2020 the Exposure Index had risen back above the 50 level. A move back above the 13 week EMA at 58.16 will be a sign these managers are adding new exposure to the stock market.

On Friday, the preliminary reading on sentiment from the University of Michigan came in at 59.7. This data point is not reflected on the chart from the St Louis Fed but it was the lowest reading since September 2011. Many headlines then reflected the growing fear in the financial press that the US was starting a new recession. The sentiment data rebounded by the end of the month and moved higher for the rest of the year. In February 2020 Consumer Sentiment peaked at 101.

The low reading was in response to the sharp decline in the Spyder Trust (SPY) of 18.7% in July and early August as US debt was downgraded. The chart shows that the volatility was high for the rest of August and September as a broad trading range developed.

The stock market reversed to the upside on October 4^th and the A/D line formed a higher low, line c. The correction low was confirmed a week after the lows as the daily S&P 500 A/D line overcame the resistance at line b, as I noted in “Be Bold, Be Fearless…Buy the Dip”.

Last week’s performance data indicated that the decline from the recent high is not over yet. For the markets it has already been a tough year so far.

The Nasdaq 100 was the weakest last week down 3.9% for the week and is now down 18.9% year-to-date (YTD). The S&P 500 lost 2.9% and also has a double digit YTD loss as does IWM.

The Dow Jones Industrial Average was down 2% last week and has dropped 9.3% this month. The SPDR Gold Trust was up 0.8% last week and is up 8.3% YTD. The Dow Jones Transportation and Dow Jones Utility average are both higher to date in March.

While many of the sentiment indicators have reached levels consistent with a correction low the daily indicators do not yet indicate that the worst of the selling is over.

That is especially true for the Invesco QQQ Trust (QQQ) that tracks the Nasdaq 100. The low last week at $319.94 was just below the monthly S1 at $320.01. There is additional support now at $316.20, line a. The declining 20 day EMA is at $341.43 with additional resistance at $345.05 and the monthly pivot. A close above the March 3^rd high of $350.04 is needed to complete a short term bottom.

The Nasdaq 100 A/D line has made a series of lower lows which is a sign that very strong A/D numbers will be required to reverse this pattern. The declining WMA and the initial resistance are at line c. A move above the downtrend, line b, is needed to complete a bottom.

Once a short-term bottom is in place it will be the strength or weakness of the next multi-week rally that will tell us more about the intermediate term trend. The weekly A/D lines will need to overcome their moving averages on the next rally. Still there are selective stocks and ETFs to buy that have positive relative performance and could be the new market leaders. It is not the time to chase prices and would only buy at good support.

Source: Forbes