The S&P 500 fell 67 bps yesterday, a modest decline following the sharp sell-off on Friday. The index had a very weak close, finishing below the afternoon’s lows. Additionally, it appeared to spend the day consolidating after filling the opening gap.
The S&P 500 futures may show the picture the best, as it appears to have formed a bear flag. The flag started developing very early yesterday and continues to consolidate all day. If the flag breaks lower, which I think it will, then the S&P 500 should fall comfortably in that 3,950 range we have been talking about for some time.
If it wasn’t clear that the Fed needs stocks to fall to tighten financial conditions to beat inflation, it should be very clear now. The Fed’s Neel Kashkari noted today:
“I was not thrilled to see the stock market rally following our most recent Federal Open Market Committee Meeting."
He also said:
”I am delighted by the market's reaction to the Jackson Hole."
In case those comments weren’t clear, he also said:
“I know how serious we are about lowering inflation, and I believe the markets were misinterpreting that at the last FOMC meeting."
So as the saying goes, and as I have cautioned for the past several months, do not fight the Fed. The Fed needs asset prices to drop and credit spreads to widen to tighten financial conditions so the economy can slow and inflation can fall. Very clear and very simple to understand. So if you want to be bullish, go ahead, but if Kashkari’s comments aren’t the clearest indication that the Fed needs assets and stock prices down, then I do not know what will be.
Microsoft
Microsoft (NASDAQ:MSFT) has a similar bear flag pattern and a huge gap that remains open from when the company reported results of around $250.
Amazon
Amazon (NASDAQ:AMZN) fell below support on Friday at $132, and a few significant gaps are at lower levels. The most notable gap is around $120, and another around $115. If the market heads lower, as I expect, then those gaps will likely fill at some point, I would think.
Tesla
Tesla (NASDAQ:TSLA) was down yesterday, but it hasn’t broken the head and shoulder pattern’s neckline. That $280 region will be crucial; if that fails, I think we will see a significantly lower price.
