The bulls have done a very nice job so far this year of overcoming the bearish narrative. Strategists were extremely negative to start the year, but were crushed as the indexes showed tremendous strength in January. Neither a lackluster earnings season nor a hawkish Fed could slow the ascent.
The market strength led to the bullish argument that there was a "Goldilocks" economy in which inflation was not too hot, and growth was not too cold. The hope was that inflation would continue to fall and that the strong growth would prevent a recession.
The reality was that a flood of liquidity from China, Japan, and a weak dollar helped to create a fear of missing out. The economic conditions never really improved. While inflation had softened a little, the Fed was not ready to pivot.
The market started to crack last week when producer price index came in higher than expected, and a couple of Fed members commented that they favored half-point increases. Then on Tuesday morning, both Walmart (WMT) and Home Depot (HD) commented about lower margins due to inflationary pressures. That took the air out of the Goldilocks scenario, and it was steadily selling all day.
Not only did the indexes suffer substantial losses of 2% or more, but it was extremely broad selling. Less than 40 of the 500 stocks that are members of the S&P 500 managed positive action today. The Nasdaq 100/Invesco fund (QQQ) was even worse, with just four out of 100 stocks in positive territory.
The bears grabbed the market momentum today and did some technical damage, but the big issue is where the market may find some support. There isn't much good support on the charts, and the bears will tell us that valuations are still far from attractive.
The good news is that this broad and indiscriminate selling will create some new opportunities, but the bad news is that it will require patience and good timing to take advantage.
I mentioned last week that the market was undergoing a change in character. The action was confirmation of that fact, and now we have to be ready for the downtrend to continue.
Have a good evening. I'll see you tomorrow.
