Up and down in chunks; one day the sky is falling and the next it is all allergen-free flowers and sunshine. Such is the state of the stock market right now.
From experience, love you, love-you not volatile swings from day-to-day are usually a sign of uncertainty. Wall Street is unsure about its feelings towards stocks and the economy.
On one hand, the economy is cooling off, if not already in a recession by the standard definition of two consecutive quarters of negative growth and a third possibly on the way. This is the love me petal. Under this scenario, the Federal Reserve sees the economy ready to tank and stops or reverses its plans to hike rates. Any soft economic news gives life to the love me petal and stocks rock.
Loves me not is the next pluck and it’s all about inflation. Unfortunately, the most recent price readings showed inflation to be stubbornly high with little to no signs of subsiding anytime soon. Jerome Powell and Co. at the Federal Reserve stated clearly that curbing inflation takes priority over the short-term health of the economy. Any whiff of higher prices and loves me not takes hold with prices backtracking.
Before we move on to our technical take, an observation about Monday’s advance. As of this keystroke, the NASDAQ traded a little more than 3.72 billion shares. It was the lightest day of trading since New Year’s Eve 2021. Apparently, bears took a three-day weekend. The lack of volume means Monday’s gains could be reversed quickly if sellers return to the fight.
Although stocks have been volatile, all the movement has been contained within the NASDAQ’s descending trading channel. As long as the top or bottom rail is not violated, the trend remains to the downside.
Based on our rules set, developed over 30+ years as market watchers, we cannot go bullish until the NASDAQ breaks beyond the topside of the trading channel with confirmation of a pivot higher. As it stands today, part one of the two-part play won’t come before the NASDAQ closes above 11,000. Then we can worry about part two.
For now, we continue to view strength as an opportunity to lighten up on underperforming holdings and raise cash for eventual reallocation into leadership companies.
Banking, banking, banking is the best way to describe the last week. Community Banks were the best performer, followed by Regional Banks and then Big Banks as the top three gainers. A little further down the list was Insurance and Financials in general. Banks benefit from higher interest rates because of the widening difference between what they pay to borrow money versus what they charge to lend.
We cannot add anything here until we get the 1-2 punch of a bullish channel break combined with a change of direction confirmation.