After a day like Thursday, where the S&P 500 and Russell 2000 dropped 2.5% and the Nasdaq Composite gave up 3.25%, everyone wants an explanation for the selling. It has been this way since I started trading in 1997. Regardless of the direction, if stocks make an outsize move, investors and the folks on TV want to know why.
I suppose yesterday's selling can be blamed on a still-hawkish Fed, continued inflation (especially on the wage side), fears of a recession, corporate earnings estimates that are likely too optimistic, and Thursday's crummy retail sales numbers. But frankly, the reason for one session's movement is typically framed and reframed to fit a narrative that a reporter, trader or writer is trying to justify. Gun to my head, this writer and trader blames Thursday's selling on the still-slow recognition that if the U.S. economy is headed toward a recession, which is clearly the consensus among the Wall Street crowd, stocks have further to fall.
Put another way, with a recession around the corner and the Fed likely to remain restrictive for at least the following year, valuations are too high. That means stock prices need to fall or trade sideways while earnings catch up, which is unlikely to happen if earnings are about to contract.
Moving on to the major indexes, both the Invesco QQQ Trust (QQQ) and iShares Russell 2000 ETF (IWM) broke beneath their 50-day simple moving averages (SMA) and volume-weighted average prices (VWAPs) anchored to the Oct. 13 bullish reversal. The SPDR S&P 500 ETF (SPY) , while still above its 50-day SMA and anchored VWAP, is badly wounded and in need of a lifeline.
The bottom line is that while I believe the bulls have a shot at pushing prices a bit higher into year-end, yesterday's decline gives sellers the upper hand. Until the index ETFs are back above their short and intermediate timeframe moving averages, I'd rather be a spectator than a participant.
I'm on vacation for the rest of 2022, so enjoy the holidays and I'll see you back here in a couple weeks.
