Yesterday saw solid rallying in the major US indexes, but crucially the S&P 500 failed at 4500 – a significant level for the index, which has previously acted as support.
Whilst this chart area was always going to be noisy – and cognizance should be taken that nothing should go up too fat too quick – solidly breaching this level on a daily or better still, weekly close would potentially indicate a resumption of the uptrend.
Today’s early morning trading is very close to this level, however the fact remains that the fundamentals remain as bearish as they have done for years. Soaring non-transitory inflation, historically high valuations, strong dollar index, Fed tapering, and propensity for rate hikes this year would suggest that current levels are yet to fully price this in.
The first downside wave all plunged through the first support level and entered correction territory with the NASDAQ leading the fall with a near 2800 drop in 2022. The rebounds, however, have been impressive, and yesterday’s price action was certainly imposing.
However, this price action looks very similar to the first drop in 2020, so the subsequent two trading sessions will be crucial to determine the short term direction of the markets. History has a funny way of repeating itself, and only the Fed can change the bearish fundamentals by reversing its policy.
Until this happens (and it will), sitting on cash and waiting for the tide to turn may be the best way to play this market, as it seems further downside looks inevitable. One more thing – don’t forget the Russell 2000 which absolutely must be used when judging the state of the economy. The FAANG stocks don’t sit in here, giving a far more accurate representation.
Comparing the charts of the Russell against the S&P and NASDAQ would suggest that bar some global powerhouses, the markets aren’t in that great shape.