Biggest Weekly Decline Since February

Image via Anthony Quintano/Flickr CC

Stocks were smacked last week as fear spread that the Federal Reserve will tighten rates faster than initially expected. I urge people to be careful and not blindly follow the public narrative all the time. The current narrative on Wall Street is that stocks fell because rates are rising – but that is not a direct correlation. For example, the $TNX, which is the yield on the 10-year, actually fell last week as stocks were smacked. The prior week, the TNX rallied as stocks fell.

Stepping back, it is important to note that we are in an aging bull market and we all know it is just a matter of time until the next bear market hits. Additionally, we know that volatility tends to spike in the latter stages of a bull market and during a bear market. For now, the big level of support to watch is February’s low. If the major indices break that level then odds favor lower prices will follow. Until then, we have to expect more sideways to higher price. Going forward, the market is very oversold and due to bounce as we enter earnings season.

Monday-Wednesday Action:

Stocks opened lower on Monday as rates continued moving higher. But the bulls showed up mid-day and helped stop the losses. The small-cap Russell 2000 which has been leading the other indices – up and down- all year bounced off important support (the 200 day moving average line) and then the other indices turned higher. In other news, Alphabet GOOGL, Google’s parent company, said it was hacked and lost exposed information for up to 500,000 users.

Separately, shares of Square Inc. SQ fell hard after a report was released that said the company was exposed to a “credit risk.” Stocks ended mixed on Tuesday after the IMF lowered its forecast for global economic growth and investors digested a few tough down days on Wall Street. Once again growth stocks were under pressure as investors waited for the next bullish catalyst to emerge. On Wednesday, the Dow fell over 800 points and the small-cap Russell 2000 broke below its 200 DMA line. In that past, that line has served as important near term support and the bulls were hoping it would serve as support again.

Thursday & Friday Action:

Stocks fell hard on Thursday as the market continued to fall and buyers were no where to be found. In the morning the market tried to bounce but sellers showed up in the afternoon and sent stocks sharply lower. It is a weak sign to see the market open higher and close lower. Stocks opened higher on Friday as the market tried to bounce from deeply oversold levels. The key now is to analyze the health of the bounce and see how the market reacts to earnings season over the next few weeks.

Market Outlook: Pullback Time

At the end of September, I noted that the Russell 2000 broke below important support and said it should be watched closely. One week later, we saw a big sell-off on Wall Street as rates spiked. The next big level of support is the 200 DMA line and then February’s low. The Dow and Nasdaq are trading near their 200 DMA lines. The bulls want to see that level hold. After that the big level to watch is Feb’s low.

As always, keep your losses small and never argue with the tape.