Published February 25, 2022
This week’s acceleration of market turmoil had us reaching back into the bag for a little history. Below is a table of single-day declines in the S&P 500. First, note how clustered these selloffs are; all but one taking place around three major events – the global financial crisis, the pandemic, and 1987 market crash.
Of course, the above single-day declines are based on the S&P 500 and do not include the grinding bear market of 2000-2002 (aka the dot.com bust), which for us was at least as noteworthy. But the returns over time from these monster declines is impressive.
Speaking of our favored Nasdaq 100 (QQQ) index, we note that the recent declines, though very heavy, have only brought the index back to a long-term moving average support line. This is a point from which the index has sprung upward time and time again over the past decade. Some have likened the current decline to the late 2018 correction, which lasted about three months. Will the current decline be more severe?
If it is more severe, the correction will likely launch a marked change in market condition, ending a decade+ bullish run. As a result, market watchers are closely looking at how stocks respond around this long-term trendline.
The chart below shows overbought/oversold conditions in the top panel with the S&P 500 charted below that. Bullish periods tend to attract buyers almost regardless of price – they want IN the market under almost any circumstance. Bearish periods attract sellers in the same way – with little regard to price – as investors want OUT at any price. The black boxes in the top panel highlight true bear market periods. In these periods, note how the market penetrates the lower green line to become very oversold, then stays that way. During the past decade, however, the market has rebounded every time it has reached the lower green line (e.g. approached an oversold condition). The S&P 500 is still a ways from that oversold condition, leading many chart-watchers to believe there is more downside to come.
Overall, it is the same message as the chart above. We have been in a decade-long bullish period for stocks. Until these charts break down, that bullish condition holds, and we expect any declines to be held by these lines of previous support. Bottom line: this week has put us at or near the cusp of a significant change in market condition.
Market Update
Investors endured another week of whipsaw trading with Russia-Ukraine tensions dominating the market narrative. After a Monday holiday, U.S. stocks joined the rest of the world’s markets in driving lower Tuesday and Wednesday as Russian troops entered eastern Ukraine. Stocks slid almost -3% over the two-day span. Stocks hit their low point for the week at the open Thursday, trading down another -3% as investors panicked with oil prices shooting above $100 per barrel and natural gas futures in Europe rising +50%. It was a classic sell-the-rumor, buy-the-news moment as buyers swooped in to drive the stock market higher. A massive 6% swing in the Nasdaq in one trading day left that index up +3%. Interest rates fell back as investors backed off expectations of a 0.5% rate increase at the March Federal Reserve meeting, a sentiment which helped growth stocks regain some appeal. Stocks followed with another +2% Friday move as prices of stocks, bonds, and oil all largely returned to where they were before the invasion, perhaps believing that the takeover would not spread beyond Ukraine into NATO member nations.
Another hugely volatile week with stocks careening in a serious bout of headline-driven trading. The S&P 500 (SPY) closed the turbulent week having held support at 4250 and higher by +0.81%. The Nasdaq (QQQ) shook off a steep downdraft to post a +1.25% gain. Smallcap stocks (IWM) closed higher by +1.52%.
Warm wishes and until next week.