NO Cause for Panic!

Market's Retrace to Key Support

KR Opinion

In the ever-evolving landscape of finance, it's remarkable how much can change in just 24 hours. Reflecting on the surprises the Consumer Price Index (CPI) might deliver and the upward trajectory of interest rates, I found myself in a complex puzzle.

Despite the S&P 500's indicators hinting that we'd maintain support levels between 4926 and 4913, the release of the CPI data upended all our technical analyses. I'll delve into this more, especially highlighting how our hourly Argos flagged a significant downturn right as the trading day began.

Despite my optimism for holding those support levels, they proved less sturdy than anticipated, breaking down past 4997 and even dipping below 4960—a scenario many of us deemed highly unlikely for the week. I'll explore this further in the S&P section later.

The markets sometimes reveal their unpredictable nature, especially when a deluge of trades moves unanimously in one direction, often resulting in what feels like panic selling. This leads to liquidity disappearing abruptly and the market experiencing sudden, steep declines. It's as unpredictable as trying to predict the flight path of a bee.

In recent days, I've talked about anticipating a market downturn, albeit expecting it to occur in a somewhat orderly fashion. Yet, yesterday's market activity was anything but orderly; it was dominated by panic selling. While I personally navigated one of my most successful trading days, it proved to be a daunting day for many investors.

Adding a layer to this narrative, let's not forget Monday's action. We saw a hefty 1.8% gain in the Russell—only for it to be utterly reversed, with the Russell plunging by 4%. I noted that the market had traded up to the extremes on the market grid, and just like that, we witnessed a complete reversal.

An old friend of mine always remarked on days like this, "it's never easy!" Yesterday certainly underscored that sentiment.

The CPI edged slightly above expectations, with the core CPI also seeing an uptick, prompting a widespread sell-off in both equities and bonds. This confirmed my speculation from the previous day about 10-year securities reaching 4.33. The annual figures also came in slightly above expectations.

Previously, the market was buoyed by optimism, with some forecasting up to seven rate cuts in 2024. However, as I've suggested for some time, such expectations were overly optimistic.

A more realistic outlook would involve a couple of adjustments to ensure real rates of return align with expectations, a point I've emphasized in my annual report.

After the recent tumult, the support levels I had been monitoring were breached, leading to a more negative outlook. However, significant support is still visible in the intermediate charts.

I'll also highlight that our database triggered a significant number of sell signals, propelling the short-term database into a liquidation phase. It's days like these that can signal a swift change in market sentiment, impacting the outlook for days to come.

In conclusion, the market is fundamentally a game of probabilities. While there was hope that the support levels would hold, the importance of being ready to adapt quickly became evident once those levels were breached. Adapting my strategy in light of new information has been one of the most critical lessons in my trading journey.

In Thursday's report, I'll examine the US Dollar and the yen more closely. Something is brewing that could catch our attention. Let's explore whether it's a minor ripple or something more significant on the horizon.

Looking Back at Tuesday’s Action

Today, the stock market decided to take a little detour down the slopes, reacting rather dramatically to the latest hot-off-the-press inflation figures. With the CPI coming in spicier than anticipated at 0.3% (we were all betting on a more palatable 0.2%) and the core CPI serving up an extra helping of heat at 0.4% (expectations were a cooler 0.3%), traders were quick to put both stocks and bonds in the "too hot to handle" basket.

The S&P 500 and Nasdaq Composite, perhaps feeling a bit adventurous, managed to claw their way up from the day's lows, inspired in part by NVIDIA (trading at NVDA 721.28, down a mere 1.20 or -0.2%), which, in a moment of defiance, surged as much as 1.7%. The indices then seemed content to meander through most of the afternoon in a steady drift, only to kick up their heels with a sharp sprint higher in the session's final half hour, propelling the S&P 500 from 4920.31 to a closing high-five at 4953.17.

When the dust settled, the S&P 500 found itself 1.4% lighter, while the Nasdaq Composite had shed 1.8% of its weight. The Dow Jones Industrial Average, not wanting to be left out, dropped a hefty 500 points.

The Russell 2000, perhaps feeling a bit neglected, lagged behind its peers with a 4.0% drop, thanks in part to regional bank shares catching the selling bug after a brief flirtation with recovery. This left the SPDR S&P Regional Banking ETF (KRE) nursing a 4.2% loss, looking wistfully at its former glory.

The small caps' performance woes were compounded by jitters over growth prospects in a world where high-interest rates are the new black. The 10-year note yield, pre-CPI announcement lounging at 4.14%, decided to climb 14 basis points to a more assertive 4.32%. The 2-yr note yield, not to be outdone, leaped 20 basis points to finish at 4.67%.

In a broad wave of selling, ten out of the eleven S&P 500 sectors found themselves at least 1.0% off their game. The real estate and utilities sectors, particularly sensitive to the rate ruckus, took a 1.8% and 1.7% hit, respectively. Not far behind, the consumer discretionary sector faced a 2.0% dip, dragged down by notable declines in Amazon.com (AMZN 168.64, down 3.70 or -2.2%) and Tesla (TSLA 184.02, down 4.11 or -2.2%).

This rally in rates, alongside the sizzling inflation data, provided a perfect backdrop for some profit-taking

shenanigans in a market that, according to some, was already eyeing a timeout for a bit of consolidation after sprinting to new all-time highs in the S&P 500 and Dow Jones Industrial Average.

Reviewing Tuesday’s economic data:

- January NFIB Small Business Optimism came in at 89.9, a decrease from the previous 91.9.

- January CPI registered a 0.3% increase, exceeding the KR Forecast prediction of 0.2% and up from the prior 0.2%. The January Core CPI also rose by 0.4%, surpassing the KR Forecast expectation of 0.3% and higher than the previous 0.3%.

The key takeaway from the report is that it provides Federal Reserve officials with fodder to continue their hawkish stance and postpone conversations regarding an initial rate cut.

It’s worth noting that there are no significant economic reports scheduled for release on Wednesday.

Wavetech Database