All washed out? Equity markets try to rally

Stocks on sale: We were looking for a level and maybe we got it; or maybe it’s a dead cat bounce. US stock markets staged one of the most remarkable turnarounds in living memory. The Nasdaq ended the day in the green having sunk as much as 4.9%, the Dow Jones turned a 1,115-pt deficit into a gain for the day of almost 100pts. The S&P 500 ended the day at 4,410, having traded as at a low of 4,222. These are the kind of wild swings we last saw in the depths of the pandemic in March 2020 when the market was deciding just how low it could go before the dip was just too good to ignore.  The Vix surged to its highest intraday level since Nov 2020 – perhaps signs of capitulation…but yesterday’s rally was probably not enough to call the bottom just yet; futures are weaker this morning. 

Notes I made yesterday afternoon about the situation as markets plunged: Forced selling to maintain liquidity is the order of the day at the start of the session…should eventually roll over…caution over looking at levels too much – when margin calls hit you are not looking at where the 200-day moving average is. Just need to get through the wash phase. 

Are we out of the wash phase now? Markets were just too oversold where they were at the lows, multiples compressed beyond where they rightly ought to be. What about levels? The Dow has stabilised around its Dec low, the S&P 500 and NDX around the Jul and Oct lows…they are just holding for now but futures are weaker despite the positive tone to European trading with the Euro Stoxx 50 +1% in the first hour of the session.

The kind of reversal seen yesterday indicate a pause rather than a bottom more often than not, a relief from extreme oversold conditions. Not all the megacaps turned green in the end: Apple, Netflix and Tesla all ended lower but off their lows. Amazon, Microsoft and Alphabet rose slightly, whilst ARKK was up almost 3% (-24% YTD). Trash led the way higher…signs of exhaustion and a bear market? Anything with a tech spin got hammered in Europe too, but are a bit firmer today – Ocado, THG, Darktrace etc.

Market volatility right now is a factor of many things, but chiefly the Fed tightening, inflation uncertainty, geopolitical tensions regards Russia and Ukraine, and a messy earnings season in full flow. As regards the tech/growth leadership in US markets we were looking for earnings growth to offset expected multiple compression from the Fed’s hiking cycle but the market is starting to doubt whether that’s going to come – Netflix was the clanging warning bell. Also doubts about rotation seeing fresh leadership as bank earnings were mixed. Earnings today coming from 3M, American Express, General Electric, Johnson & Johnson, Verizon, AMD and Microsoft. And it’s unclear what the Fed will do next. Meanwhile the US has put 8,500 troops on standby ready for deployment in eastern Europe .

Stagflation setup? Data is looking mixed – PMIs back to almost 50, retail sales soft…lots of indications that inflation is dragging on growth + the S&P 500 in correction territory yesterday…does the Fed maintain its hawkishness? Or does it drop its guard a bit to allow some cooling in the market? The FOMC begins its two-day meeting today. 

Elsewhere, dollar strength evident and mounting – bullish MACD crossover on the dollar index, bearish crossovers for EURUSD and GBPUSD. Yields not doing much – the selling in equity markets was as rush to the exits because someone had shouted fire…the bond market is trying to find out whether that fire is real or not. Bitcoin staging some fightback but still under pressure, gold is bid at $1,840 as real yields edge down.