S&P 500's 'Round Trip,' NASDAQ's Jump, Dow's Return - What A Wild Ride!

Daily and weekly volatility have been historically high. Ironically, unusually high volatility is more often found during bear markets than near all-time highs. One notable exception is visible on the chart above—2000.

Thankfully this level of volatility does not occur very often.

On the other hand, corrections of 10% or more are historically much more frequent than we’ve experienced in recent years. Given that we have not seen one for quite some time, this may have made the sudden and steep moves, both up and down, that much more pronounced.

The good news for many of our loyal and valuable readers is that our indicators started to forecast this back in the 4th quarter of 2021. Something just did not smell right as we have referenced in this column repeatedly.

Luckily, and with grateful good fortune, most of our investment strategies have been in defensive mode for weeks now, avoiding much of the selloff. In fact, our ETF Complete model began taking an inverse (short) position recently and is positioned to take advantage of any more weakness.

The markets had a confluence of several significant factors that hit all at the same time.

Geopolitical tensions, mixed earnings, and higher-than-expected inflation data were already percolating, and most disconcerting is the flattening yield curve which is a leading indicator for recessions.

On Wednesday, Jerome Powell, the head of the Federal Reserve, came out with a hawkish, but expected plan. They will continue to stop their Bond buying (mortgage-backed securities) and most likely by March, raise the key bank lending rate to try and slow the red-hot economy and rising inflation. This immediately hit the smaller stocks, those that will be most impacted by the rising rates.

The 10-year Treasury rate trended up most of the week, which spooked the stock market as investors got leery of holding high multiple stocks.

Late in the week, we received the good news that 4th quarter GDP came in at a whopping 6.9%. An oversold market rallied hard, and after all the craziness we saw during the week, the markets (S&P 500, Dow and NASDAQ) all had a positive week. Is this the turn?

Probably not. We have broken some key support and the iShares Russell 2000 ETF (NYSE:IWM) (Small Cap) stocks are in a bear phase and not looking good.

We have mentioned here in the past that stock prices are driven by these factors: Inflation, Interest Rates, Earnings, Human Behavior/Sentiment and Money Flows.

Inflation currently remains high and with supply chain issues and lingering COVID, this key indicator is trending higher. This remains negative.

Interest Rates are trending up especially in light of the hawkish comments this past week by the Fed Chairman Powell. This is trending negative

Money Flows (reflected in negative investor sentiment) have turned neutral to negative and keeps the market cautious. This has turned neutral

Earnings, however, are good and should provide support for the market, but as our own Mish believes, “probably keep us in a trading range.”

According to FactSet, 33% of S&P 500 companies have reported earnings, with 77% beating their earnings estimates and 75% reporting revenues above their estimates.

This bodes well if the earnings “beats” can be far enough above the street’s expectations to attract investors. We clearly saw this on Friday as Apple (NASDAQ:AAPL) and Visa (NYSE:V) both beat expectations by a wide margin and helped propel the tech heavy NASDAQ up over 3%. This is trending positive.

Sentiment indicators hit extremes in negative readings, which at least on a short terms basis, could support a short-term bounce. However, longer-term sentiment has a lot more downside potential.

Based on these inputs, we would say right now that the market is sitting neutral to negative. Caution and risk aversion is warranted.

We mentioned above that the Russell 2000 (IWM) has gone sideways since last February, as our own Mish has pointed out repeatedly on National TV for the past few months. The Russell 2000 (small cap index) has now plunged over 10% YTD and is now in a bear phase. As Mish often points out using her Economic Modern Family with Grandpa Russell, this is the part of the market that drives the economy and represents the bulk of America’s manufacturing companies.

Jim Cramer (CNBC), on Thursday’s morning broadcast, pointed out that these small companies have suffered mightily. Here are the statistics Jim cited in his report:

650 New IPOs since 1/21. On Thursday, 67% were below their offering prices, and 37% were at least 50% below their IPO price. Of 205 SPACs monitored, 86 were below their offering price of $10, and 41.5% of the 86 were below $5.

We are likely to see more volatility and rough sledding especially in February. According to Hirsch and Mistal’s 2022 Stock Trader’s Almanac, February is the weakest link in the “Best Six Month” period of the year that begins in November.

February’s post-election year performance since 1950 is miserable, ranking dead last for S&P 500, NASDAQ, and Russell 2000. Average losses have been sizable: -1.5%, -3.3%, and -1.6%, respectively; February 2001 and 2009 were exceptionally brutal. NASDAQ dropped 22.4% in February 2001, its third worst monthly loss ever.