Well, it looks like we need Emily Litella back today…so that she can say, “Never mind” once again. It looks like we’re going to see a fourth day in a row where the stock market moves in the exact opposite direction of the previous day…and does so in a significant manner. The overseas markets and the domestic futures are all bouncing back in a big way this morning, but there is a big difference between the catalysts for the moves on Friday/Monday…and Tuesday/today. On Friday/Monday, we went from thinking about the new omicron variant…with it being a major problem Friday…to one that was a non-event on Monday.
However, even though yesterday’s early morning decline had to do with more concerns about Covid, the vast majority of the decline had to do with monetary policy, not the omicron variant.
In other words, the most important catalyst for the large decline yesterday was what we believe is a significant change in policy from Fed Chairman Powell. Some people would say that it was really more of a change in tone, but we would say that a significant change in “tone”…does equate to a significant “change” in policy as well.
In Fed Chairman Powell’s testimony in front of Congress yesterday, he did not say anything that wasn’t already rumored in recent weeks. Yes, it DID change the Wall Street narrative back to a more aggressive tightening stance for the Fed…after it had briefly turned much more dovish on Sunday and Monday…but it was still very similar to what other Fed members (like Bostic & Daly) had said over just the past week. In other words, the omicron variant had taken a more hawkish Fed off the table for a couple of days, but Mr. Powell put it right back in the middle of the table yesterday.
In fact, we would say that he SLAMMED the issue back into the middle of the table. Over the past three years (since Q4 of 2018), Mr. Powell has always tried to make any comments he made in public in as dovish of a manner as he could. Even when he was becoming more hawkish over this past summer…about when they would “taper”…he did so as dovishly as he could. (Remember when some people said his public comments were “dovishly hawkish” over the summer?)
This ALL changed yesterday. For the first time since Q4 of 2018, Chairman Powell made ZERO effort to make his comments “dovishly hawkish.” There was nothing vague about what he said. He said, “The economy is very strong and inflation pressures are high”…and as we all know by now, he said that the term “transitory” should be thrown out the window…and that the Fed will be seriously discussing the idea of raising the rate by which they taper back on their bond purchases……….Finally, not only did he say that the omicron variant would not cause them to become more dovish, he indicated that the variant could make the inflation issue an even worse one!
Again, this tone is completely different than anything he has used over the past three years…and THAT, in and by itself, equates to a significant change in policy by the Chairman and the Federal Reserve as a whole. In other words, the “gradualism” that the Fed has been using all year is gone. Therefore, the way that investors should be looking at the strategy of “Don’t fight the Fed” has changed in a substantial way this week.
The internals of the stock market yesterday were abysmal yesterday. Volume spiked to over 6.2 billion shares on the composite volume. That is (BY FAR) the highest non-quadruple-witch-expiration volume we have seen all year. In fact, the June “quadruple-witch” expiration didn’t even beat yesterday’s volume…so we’ve only seen two other days this year with more volume!…As for the breadth, it was a whopping 71 to 1 negative on the S&P 500 and almost 25 to 1 negative on the NDX Nasdaq 100!!! It was also 8 to 1 negative on the NYSE Composite index…but just 2.3 to 1 negative on the Nasdaq Composite.
Actually, the volume data and the breadth on the S&P 500 were so extreme, that they could be signaling a bit of short-term capitulation. Therefore, the market could indeed bounce for a couple of days. Having said this, anybody who thinks that the market has become washed-out on an intermediate or long-term basis is out of their minds. The S&P 500 rallied over 110% from March 2020 until the November highs, so a drop of less than 3% is certainly not going “washout” anything…except on a VERY-short-term basis.
For 20 months, “buy every dip” has worked EXTREMELY well. Now that the Fed has started to tighten monetary policy…AND changed their tone to a MUCH more hawkish one…investors should be looking for bigger dips before they get too aggressive on the buyside in our opinion. In fact, they should be shifting to a strategy that involves, “sell the bounces.”………We have said several times recently that the impact of “momentum based algos” and options “gamma” work in both directions. Well, so does “don’t fight the Fed.”
If the stock market rolls back over soon…as we expect it will…the support levels we highlighted yesterday morning are still in place. However, we would add one more level after yesterday. The S&P closed right on its lows, so with this morning’s bounce, the 4,560 level is now one to watch as well. However, even though a lot of people will be focused on the 50-DMA, we still think the 100-DMA is the more important level to keep an eye on. Not only has that line provided very strong support over the past 14 months, but it is also very near where the trend-line from the 2020 election comes-in. Therefore, if the market rolls back over any time this week or next, the 4,480ish level is the one we’ll be watching very closely. Any meaningful drop below that level will signal that a much more meaningful decline is going to hit us before year-end.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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