The financial markets were closed on Monday in honor of Dr. Martin Luther King Day. One of my favorite quotes from the civil rights leader is:
“If a man is called to be a street sweeper, he should sweep streets even as Michelangelo painted, or Beethoven composed music, or Shakespeare wrote poetry. He should sweep streets so well that all the hosts of heaven and earth will pause to say, ‘Here lived a great street sweeper who did his job well.”
We try to live up to Dr. King’s inspiration in this newsletter. Gauging what the stock market is going to do next is no easy task. Usually, we get it right and our streets are neat and orderly. But other times, the market head fakes, we swing and miss like Dave Kingman, and our streets look unkept.
Unfortunately, we are in times of uncertainty with many unknowns: how high and long will inflation last? How many interest rate hikes are coming? Is the economy going to slow down? What will earnings and guidance be for 2022?
The last question will be the first one answered as earnings season begins in earnest next week. Wall Street will have its ear tuned to corporate expectations for the first quarter of ‘22 and full year. Investor reaction to financial report cards will determine if the NASDAQ can get out of its volatile grind between 15,900 and its 200-day moving average, now at 14,726.
Last week’s trading action is worrisome. The index rebounded early in the week, only to give it all back on Thursday. The top was significantly lower than the previous rally’s high. That is the definition of a downtrend.
Once again, it puts the index in a box with a defined upper and bottom guardrail. If the NASDAQ can make it past 15,300, then it could pop its way back to 15,900. However, if the index crashes through the bottom of the box and its 200-day moving average, then 14,000 might come into view quickly. Break 14k, and Wall Street could chop off another 1,000 points in a hurry.
Put more succinctly, stocks have more downside risk than upside potential now as there is a bunch of technical debris overhead and not much on the way down. Investors might consider using rallies to raise cash until the NASDAQ is on firmer footing.
It was another strong showing for sectors that tend to do better with inflation and the prospect of rising interest rates. Energy, banks, and financial institutions dominated our performance leaderboard, owning nine of the top 10 spots. Invesco Dynamic Food & Beverage ETF (PBJ) is number nine. However, it is a “defensive” sector as people buy food first.
The picture sectors painted last week is one of continued inflation, higher interest rates, and a weaker consumer. Doesn’t sound so encouraging, does it?
Considering we believe the NASDAQ has more downside potential than upside potential, and the message sector performance appears to be sending, we can’t even think about new individual stocks until we know the answers to the current slew of unanswered questions.