While markets continue to fight the steeper and steeper battle of inflation, eyes shift toward the FOMC this and Chairman Powell on Wednesday. Markets are expecting a 50 bp rate hike according to Bloomberg. And let’s be honest – calling what Americans are seeing with their own eyes inflation is almost inflammatory right now. ALL of the stuff people see — food, energy, housing, and vehicle prices — which basically make up the majority of consumption for most households — ALL of it has spiked in price.
The war in Ukraine, while a human tragedy, seems more a distraction and divider politically than the driver of all of this. It was well underway more than a few weeks ago. The ramifications of the massive spending are here. Now what?
Markets, being the leading indicators that they are, have given up significant value. Last week they failed to find traction and continued to decline.
A case can be made that this market is already in bear territory. Nearly 75 percent of the constituents in the S&P 500 are off more than 10% from their highs. Over 60% are off more than 15 percent. And over 40 percent are off more than the typical 20 percent measure for a bear market. But these numbers don’t consider the fact inflation is running close to 8 percent (published). When considering inflation as part of the loss, the major indexes are all in bear territory already.
The question is whether or not more downside is in the works. The 50-day moving average will likely cross below the 200-day moving average this week. This ‘death cross’ isn’t viewed favorably by the markets.
We haven’t seen this condition since the start of the pandemic. It was short-lived then, as that was just the beginning of a bigger money-printing push. But this time we’re staring into the face of (hyper?) inflation. The money has already been printed. What it paid for? Debatable.
Government isn’t one to admit it was wrong. It’s bad for reelections. So instead it’s typically just spin. In this case, the financial ramifications of a clumsy and political response that valued narrow medical data over more comprehensive data that included the economic impact of the decisions is coming back to reality. Printing money has consequences. This is it.
So expect rates to go up. Expect inflation, for the short-term, to continue to increase. We’ll spare the ‘why’ section that unpacks the political science and stick to the stuff market participants care about. Keep an eye on the February 24 lows. If the market, even intra-day, drops below the intra-day low of February, the probability of a test of the 4000 level on the S&P 500 goes up dramatically. A close below 4155.77 for the SPX would be a very negative sign. An intraday move below4114.65 is an almost sure-fire bet this market goes lower.
Basically, if the market dips below that February level, confidence is likely to crater and a probable test of 3900 on the index emerges. At that point, it’s a full-blow academically defined bear market — no need for the slight-of-hand interpretation that considers inflation. We’ll just be there.
Keep an eye on the biggest players in the index. If they start to fall, it will likely drag down the entire index in a hurry. So the AAPL, GOOGL, MSFT, TSLA’s of the world that represent huge buoys to the index when they hold their value could also represent a huge anchors if they don’t.
For the week, the futures bias is ever so slightly positive. But with all the geopolitical risks out there, that doesn’t mean much. Trying to call a direction for this market has been extremely difficult. VIX pricing suggests a slightly higher probability for a positive outcome this week. But did we mention all the wild cards? Flip a coin, cross your fingers, or just hope for the best. This week is probably the tell for the markets. Either the line holds, or the probability of a bear jumps significantly.
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