Stocks were smashed on Feb. 23, with the S&P 500 dropping by nearly 1.9% and the NASDAQ ETF dropping by almost 2.6%.
S&P 500
At this point, with 4,250 broken and the index all but taking out the lows of January, one needs to wonder what happens next. Tough call because this market could go any number of ways, and while some may see a relief rally coming because the market is oversold, I would argue it is not oversold.
The RSI is still at 32 and could fall well into the 20s without taking the prior lows. So I think one needs to be careful about falling into the market’s trap of being oversold. I suspect that the selling isn’t over, and we visit 4,180 and lower over time.
The channel lower is now very well defined, and at this point, the index could fall to 3,850 and still only be at the lower end of the channel in just a few days.
In 2020, during that market sell-off, the S&P 500 hit an oversold reading of 19 on Feb. 28 and fell 23% as the RSI increased to 30.
VIX
The VIX did rise slightly yesterday to 31 but is nowhere near capitulation-like levels. So if the market opens higher, we run the risk of a Vanna rally as the VIX drops. However, I think any rallies will be short-lived, and the VIX will ultimately need to reach much higher levels before this is over.
Financial Conditions
Meanwhile, financial conditions continue to tighten based on the IEF/LQD ratio. The exciting thing here is that the ratio hasn’t hit the 2018 peak despite the significant rise. So there could be much further to climb on this ratio.
10-Yr.
There is nowhere to hide this time either; with yields rising, it makes for losses all around. There is no flight to safety yet, and that implies this stock market has further to drop. Typically, you find people rushing to safe havens towards the bottom of a stock drop. Well, the 10-year yield was up four bps to close at 1.98% and probably still on its way to 2.16%.
Microsoft
Now Microsoft (NASDAQ:MSFT) is very close to breaking down, sitting just a touch below support at $282. A further decline to $262 seems possible.
Netflix
We need to consider the reality that if Netflix (NASDAQ:NFLX) falls below $360, there is a very good chance this stock goes back to $300.
Qualcomm
Qualcomm (NASDAQ:QCOM) has that giant gap at $140 to fill.
