Many investors were hoping that a less hawkish Fed, positive seasonality and poor positioning would provide more upside before the end of the year. But instead the bear market came back with a vengeance.
Buyers didn’t even try to step in after Monday’s weakness and selling pressure gathered pace. The most notable aspect of Tuesday’s action was the very weak breadth. Bid was more than three-to-one negative.p>
One of the more worrisome signs was that the number of stocks hitting new 12-month lows jumped well above 370. That’s not even close to the circa-2000 levels reached when the S&P 500 was bottomed in June and October, but given how far this rally has come in the past six weeks, this is a surprisingly high level.
Another issue of concern is technical patterns. Indices have given back all the gains made since Fed Chairman Jerome Powell’s speech last week and are now breaking below support levels. There is still room to move, ahead of 50 -daily simple average to come into play, but it’s not an attractive look.
What has changed is that the market is no longer just focused on the next rate hike from the Fed. Now the focus is on the outlook for next year, which does not look good. The main issue now is inflation, related to employment, not just relative to consumer inflation. There are strong concerns that the Fed cannot deal with a strong labor market without having a significant impact on growth.
It is interesting to note that bonds have been strong and yields have been falling, possibly due to concerns about an economic slowdown. On the one hand, we have concerns that the Fed will raise rates quite a bit more next year, but since on the other hand, bonds are acting as if the economy is going to slow dramatically. That sounds like a recipe for stagflation, which is a good reason why the market is behaving so badly.
Part of the problem is that we don’t have an immediate catalyst to affect negative momentum. There is a PMI report on Friday and then a CPI report next week before the Fed announcement, but right now there are no headlines that can change market sentiment.
We’ll see if some brave bearish buyers try to take advantage of some oversold stocks on Wednesday, but there’s no news flow right now to help the bullish cause, and sentiment is clearly pretty bad.
Dealer Anatoliy Pavlov