Many investors were hopeful that a less hawkish Fed, positive seasonality, and poor positioning would deliver more upside before the end of the year. But, instead, the bear market has returned with a vengeance.
Dip buyers didn't even try to jump in after the weakness on Monday, and the selling pressure picked up momentum. The most notable aspect of the action Tuesday was the very poor breadth. There was nowhere to hide. A few China names showed some relative strength, but breadth was more than three-to-one negative, and the Nasdaq 100 fund (QQQ) could only manage about 10 stocks in positive territory.
One of the more worrisome signs was the number of stocks hitting new 12-month lows jumped quite a bit to over 370. That isn't even close to the levels around 2000 that were hit when the S&P 500 was at lows in June and October, but given how far this rally has carried over the last six weeks, it is a surprisingly high level.
Another issue of concern is the technical patterns. The indexes gave back all of the gains produced by Fed Chair Jerome Powell's speech last week and are now undercutting support levels. There is still room to the downside before the 50-day simple moving average comes into play, but this is not an attractive look.
The rally off the October lows was based mostly on the narrative that inflation had peaked and the Fed was going to slow its roll for a while. Rates may eventually go higher, but the Fed was willing to see what happens. That narrative has gone out the window as concerns about strong employment have become the focus.
It is interesting to note that bonds were strong and yields were falling, which is likely due to concerns about a slowing economy. On the one hand, we have worries about the Fed raising rates quite a bit more next year, but on the other hand, bonds are acting like the economy is going to slow dramatically. That sounds like a recipe for stagflation, which is a good reason for the market to be acting so poorly.
We will see if some brave dip buyers try to take advantage of some oversold stocks on Wednesday, but there is no news flow to help the bullish cause right now, and sentiment is obviously quite poor.
Have a good evening. I'll see you tomorrow.
