April 27, 2022
Good morning,
The sell-off in recent days has been as violent as it has been rapid. From last Thursday’s high to yesterday’s low, the S&P 500 plunged 7.5%. The drop has put the index within 1.5% of its February 24th intraday low, which came the day of Russia’s invasion of Ukraine. That was 8 weeks ago. Recall the record oversold readings registered just before the invasion, in addition to the rally record around “crisis events”. Combined, these two contrarily bullish ingredients led to an 11% rally on the S&P 500, and produced a few bullish breadth thrust signals that have a record of higher stock prices 6mo and 1yr later.
If we look back at the history around breadth thrust signals, there have been drawdowns after the signals were registered. The record suggests that pullbacks shortly after breadth thrusts (6wks in this case) have corresponded with weaker performance for up to four months later compared to other breadth thrust signals, but the return differences mostly disappeared 6 and 12 months after the initial signal, on average.
The market is measuring mildly oversold currently, as it approaches its lows set back in February and again in March. It suggests the broad market may have further downside in the coming weeks.
The implication of today’s analysis is that short-term weakness may last a few more weeks or months, but it will not negate the bullish six and 12-mo message registered in February. Does this technical viewpoint foot with the market’s current macro view? I think it does in that the market seems to be anticipating a peak in inflation in the weeks/months ahead and in that time, we’ll likely have had two more aggressive rate hikes from the Fed. And maybe most importantly, in a few months the markets will be looking at 2023. Can’t wait.
Be well,
Mike