Growing up, we used to watch a black and white tv show titled “Lost in Space.” There was a robot in the show named Robot who used to say, “Danger, Will Robinson” when the robot sensed trouble. Well, if Robot were here today, he might be saying Danger, Will Robinson regarding last week’s stock market action.
Inflation reports were hotter than expected and Wall Street was forced to reassess its view that the Federal Reserve might be close to pausing interest rate hikes. The rebound in prices has traders concerned that rate increases could continue, which would be a negative for the indexes, as they were through 2022.
The danger of continued rate hikes slammed the brakes on 2023’s rally and busted the uptrend that began in early January. As we noted in last week’s newsletter, if the NASDAQ fell through the floor of resistance, it could dip to its 200-day average. That’s where last week ended. We also see a one-two of lower in cycle lows.
Normally, we would view “stepping down” stairs as the start of a new downtrend; however, with support at the 200-day average, it’s too early to say the NASDAQ is likely to head lower. There is a conflict between two technical traits. First, as you will see on the chart below, we have the index stepping lower, which is a negative. Secondly, support at the 200-day average is likely to attract some buying, which is a plus.
In our opinion, Wall Street could move into indecisive mode and trade in a range for the next few weeks. Since inflation had been responding to the Federal Reserve raising rates, investors might feel the recent higher than expected inflation results could be a temporary blip. If so, stocks might run in place, bouncing and down as the Street waits for the next round of inflation results.
For now, if the NASDAQ continues downward, it should catch support at the 50-day moving average of 11,190, which isn’t all that far below. There are a few technical obstacles to the upside between the 200-day and the recent high of 12,200.
If the NASDAQ can close out the week ahead on the plus side, we would not be surprised to see the index spend some time trading between the 200-day and 12,000 until we know if the rebound in higher prices is a trend or temporary. The answer will determine if Robot’s Danger, Will Robinson was a false alarm or the start of another downtrend.
It was a tough week for industries and sectors as all but SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and Energy Select Sector SPDR Fund (XLE) were underwater. It was also a week where SPDR S&P 500 ETF Trust (SPY) outperformed Invesco QQQ Trust (QQQ), which is not what we’d prefer to see.
Considering the market could be in a state of indecision in the immediate term, we’ll stay away from adding any new sector to this space.
The same goes here. We’ll wait to see if the NASDAQ pivots higher or takes another step lower before jumping on any new individual names.