January 24, 2022
Good morning,
In just four days last week, the U.S. equity market suffered a heavy toll with the S&P 500, Nasdaq Composite, Russell 2000 down -5.67%, -7.55% and -8.07%, respectively. And for the fist time in 2yrs, Covid doesn’t make the list of the top reasons for the sell-off. Side-note: this probably marks the point in time where markets around the world begin to consider Covid an endemic.
Last week’s accelerating sell-off seems to have been driven by fear that the Fed will raise rates much faster than expected only a few weeks ago – the rate of the change of rates. Throw in geopolitical concerns for the Ukraine, front and center this morning, and this week is picking up at the same place last week left off – Risk Off. Pre-opening futures point to a 1.5%-2% further decline this morning in the 3 indexes noted above.
You have heard me say/write many times over the past few years, the technicals kept us in (invested), we’ll rely on the technicals to take us out (reduced recommended equity weighting in portfolios). For the first time in two years, looking at the body of technical evidence, as of this morning, you can say that the trend has moved from leaning slightly bullish most recently to leaning cautious. In long term models that taxable portfolios stay aligned with that translates to being less than maximum overweight equities for the first time since the bull market began almost 2yrs ago. That is not a clarion bell to sell all and head of the hills. The model is still overweight equities – just not to the maximum permitted.
Emotions are running high now as they tend to do in steep sell-offs, the VIX is over 30 for a statistical data to support that statement. The market is very oversold and from a short-term oversold perspective, it is at a place it only gets to less than once a year, on average, over the past 10 years. Are we seeing some capitulation this morning? Maybe a hint, which would be nice, if true.
It is a Fed week this week: Wednesday’s Fed meeting may provide an opportunity for Jerome Powell to provide some reassurance to beleaguered markets…or to lower the boom on risk sentiment. This Fed has risen to the rescue of risky assets before, it likely will again.
Given the elevated VIX – I’ll see you tomorrow.
Be well,
Mike