S&P 500, Nasdaq Talking Points:
It’s been an eventful week across U.S. equity markets as worries about rates continue to get priced-in. This week was especially volatile given a couple of factors in the backdrop. The Fed has a rate decision next Wednesday and markets are geared for the bank to lay the groundwork for a hawkish policy shift. How hawkish remains the question. Asset purchase taper is a given as is the expectation for a rate lift off in March.
But – what will the bank say about Quantitative Tightening? And given all of the recent focus on inflation, including some very pointed comments from US President Joe Biden and Treasury Secretary Janet Yellen, it seems that the Fed has some fairly direct marching orders to get inflation under control. And QT may be a way of moving towards that end without having to hike rates even more aggressively than initially planned.
That factor played into another reason of uncertainty for this week: No Fed-speak. Markets have become somewhat accustomed to supportive Fed comments in the midst of major market sell-offs. That wasn’t possible this week as the Fed was in a blackout period ahead of that rate decision next week.
But – as highlighted in this week’s forecast in which we took a bearish outlook on U.S. equities, this week was OPEX, or the monthly option expiry, which takes place on the third Friday of the month. Given the intense options activity that’s becoming more commonplace in equity markets, this can force dealers to force prices moves when hedging their portfolios to open options risk. Justin McQueen pointed out last week that this has been a generally negative factor for stocks throughout 2021 and, given this week, that trend has continued into 2022.
This is the pressure point and there’s a lot of unsettled uncertainty here. Markets have absolutely gotten ahead of themselves in pricing-in a more hawkish Fed and it really does feel like markets are harboring the expectation that inflation is not transitory at all and will persist through even two or three rate hikes.
At this point, markets are pricing in a 46.2% chance of two rate moves, or 50 basis points, at the March rate decision. But it’s going out to the end of the year where matters get really messy, as the median expectation is now for four hikes this year. But, there’s even some expectation for as many as 6 or 7 hikes. There’s currently a 35.7% probability of at least five hikes this year.
All of this for a Fed that’s been generally passive as far as higher rates are concerned in the aftermath of the Financial Collapse more than a decade ago.
Rate Probabilities to December, 2022
Data taken from CME Fedwatch
Rates gapped-higher to open the week and remained very near the highs until this morning when rates gapped back-down to last week’s levels.
This can provide a bit of support to stocks, but the impasse remains until greater clarity is offered from the FOMC. As of this writing, the 10 year note is trading right around last week’s close of 1.77%. It’s the 1.8% marker that seemed to cause concern this week, so that’s another inflection point to watch for queues on equity themes as we approach next week’s FOMC.
10 Year Treasury Note
Coming into this week there was a trendline that began around the lows from the Presidential election in 2020 that had remained in-play ever since. There was a series of confirmation wicks around the Q4 open but, until last week, that trendline had remained unfettered.
Until this week, that is. Prices jumped through that trendline on Monday and that prior spot of support soon became resistance intra-day on Wednesday.
S&P 500 Daily Price Chart
S&P 500 Searches for Footing
At this point the S&P 500 has traded through a number of support levels on the way down to fresh three-month-lows.
Each of those prior support levels become potential resistance on the way back up, providing target potential to buyers and bearish entry potential to bears. At this point, oversold readings have started to show on the Daily chart illustrating just how quickly this change-of-pace has come into the equation.
This could make selling after 5% sell-off this week and a 7.88% sell-off so far this year a challenging prospect whilst price is right at the lows. There may, however, be a bit more of a fundamental rationale for such a stance in the Nasdaq 100, which we’ll look at after the next chart.
S&P 500 Two-Hour Price Chart: Focus on the Recent Swing High/Low
Chart prepared by James Stanley; S&P 500 on Tradingview
Nasdaq 100 Slammed as Tech Falls Further Out of Favor
Netflix is getting slammed on the open and this highlights the greater vulnerability of tech as we get deeper into this rising rate theme. And comparing this week’s 5% sell-off in the S&P 500 to the 6% sell-off in the Nasdaq 100 illustrates this well. As looked at in this week’s forecast on US equities, the Nasdaq could remain as the more vulnerable venue as markets gear up for a more-hawkish Fed.
Similar to the S&P 500 setup above, there was a trendline in-place since the November 2020 election that had held the lows throughout last year. The trend channel looked at below spanned a whopping 53.24% move.
But, as I had shared in early-January, even before the pain started to get priced-in to equities, the Nasdaq 100 was beginning to show bearish symptoms, highlighted by some disconnect with the S&P 500 early this year. The lower highs from November to January have since led into a strong spill in the tech-heavy index.
From the below, notice the already oversold reading in the Nasdaq via RSI on the daily chart. The last time one of these reading showed up was in early-October, just ahead of a 16.7% ramp in a little under two months.
Nasdaq 100 Daily Price Chart
At this point, selling such a well-developed move, especially ahead of a weekend and an FOMC rate decision, could be a challenging prospect. But – prior points of support may offer some guidance; and, of course, there is the potential for breakout strategies given how sharply the move has priced-in.
The newly formed three-month-low rests at 14,602 and breaks below can open the door for breakout strategies. But, it’s the 15k level that looms large for potential resistance. For those that are aggressive or unwilling to wait for a 15k print or a support breach, the recent swing-high at 14,816 may offer a bit of guidance, but price action around this level could be messy given the low-liquidity environment from which it printed.
Nasdaq Two-Hour Price Chart
Chart prepared by James Stanley; Nasdaq 100 on Tradingview
— Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX