May 27, 2022
Good morning,
Fridays before a 3-day holiday weekend are often quiet affairs for markets. The overnight trading session for U.S. Futures was true to form then – a very quiet affair (Futures +0 to 20bps before the open). With trading desks lightly covered by only the lowest tenured and interns – today may be a quiet one.
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The S&P 500 Index is up 6.5% this week from last Friday’s intra-day low. For a market that was down for the past 7wks in a row (only the 4th time in post-War history that’s happened), a bounce of some sort is probably surprising no one this week.
With the S&P 500 down as much as 18.7% on a closing basis, the question has been whether all the bad news from the Great Unwind has been priced in. Ultimately, whether the decline is nearing its end or has months more to go will depend on whether the Fed fails to achieve a soft landing and the economy falls into a recession.
Financial markets are forward looking, price-based indicators (technical) are likely to be the first to signal the downtrend has turned into an uptrend. With a rally underway this week, it would seem to be a good time to define what a bottom may look like from a technical perspective. Typically, the market follows a four-step bottoming process: Oversold, Rally, Retest, Breadth Thrusts (email me for definitions of any of these). The bottom line for the market today is that it has achieved the first step (oversold) and is attempting the second step (rally). But, technically, until the market can move to step four (breadth thrusts), the bottoming process remains ongoing.
Having dropped a cloud of sorts over this week’s rally, I must add that there are a few rays of sunshine piercing though the cloud cover above. There is evidence of base building around diminished selling pressure and global divergence around the latest U.S. lows. Downside participation by the broader market has dwindled – new lows are lacking and new highs are starting to appear again. A bottoming process appears to be unfolding. Could a retest of the lows be ahead, certainly, but the point of maximum panic and fear may be behind us.
And with that … have a lovely long weekend.
Be well,
Mike