Well, there is no question that the volatility that we’ve seen all year so far this year, has not gone away. We had another roller coaster ride yesterday…with a nice mid-afternoon rally…but that rally failed in the last hour of trading. The decline in the last hour did not take the stock market dow to the lows of the day, but it still left us with a 1% decline in the S&P 500 and 1.2% drop in the Nasdaq Composite (-1.0% on the NDX Nasdaq 100).

The decline came on strong volume (4.8bn shares on the composite volume)…but the breadth was not all that bad. It was was 3.3 to 1 negative on the S&P…and 3.0 to 1 negative on the Nasdaq Composite (and just 2.3 to 1 negative for the NDX 100). Those numbers are obviously negative, but they’re not as bad as we usually see when these indices fall 1% or more. However, it was still quite disappointing that the strong bounce that took place after President Biden spoke did not last very long. Instead, the market rolled back over and close much closer to its lows of the day than its highs.

Having said this, the futures are trading higher this morning. The reason being given for the rise seems to be the thought that the sanctions that President Biden announced yesterday are very “soft”…and not as extensive as some government officials had been warning about. Therefore, the lack of escalation in the situation has the market trading higher this morning. That’s great, but this also means that Vladimir Putin will be able to extend this crisis…and even elevate it…in the days and weeks ahead. Of course, maybe he will be satisfied with merely gaining control of the two eastern provinces in Ukraine…and any further incursions will come many years from now. So maybe these developments are indeed positive.

We are not geopolitical experts, but that conclusion seems to be a big stretch. Yes, it will be great if Mr. Putin just stops what he is doing and declares victory with what he has, but if the sanctions are not going to very harsh, it would seem to us that he would continue with his hawkish tone…even if he does not push further into Ukraine immediately. In other words, this is not a development that tells us that crude oil and natural gas prices are going to drop in a significant way. Sure, it could/should keep these prices from skyrocketing over the short-term…and they are down slightly this morning. However, the impact of higher energy prices on Europe…and around the world…is going to remain a problem unless Putin backs down in a significant way. Based on what we’re seeing right now, that does look very likely any time soon.

In other words, the fact that Mr. Biden has not been as tough as many people were hoping on this issue does seem to have lowered the odds of an immediate full-scale invasion. However, we believe it has also raised the odds that Mr. Putin might get more aggressive before long…and it all but certainly raised the odds that this geopolitical issue is going to impact the level of energy prices for quite some time. (Keep them elevated.) That’s not good news for those looking for the economy to stay strong in the coming months…and it is likely the reason that the yield curve continues to flatten. This morning, the 2-yr/10yr spread has flattened to just 36 basis points.

Moving to the technical side of things, we’ve been saying for several weeks that the “line in the sand” for the stock market is the intraday lows from January. The DJIA and the S&P 500 both finished the day below their closing lows from January, but still remain above their intraday lows from last month. The Nasdaq composite closed just above its January lows, but the NDX Nasdaq 100 made a new closing low for the year. We’d also note that the NDX is the one index that has tested is intraday lows from January. It got within just a few pennies of that level early in the afternoon…and then bounced. Like everything else, it rolled back over in the last hour, but it did not go all the way back to those midday lows.

Therefore, given that the NDX has tested the 13,720 level on an intraday basis at one point in each of the last two months, this level has become and even more compelling “line-in-the-sand” level for this tech laden index. If it can rally strongly in the coming days, it would signal that it has made a nice short-term “double-bottom”…which would obviously be quite bullish. If, however, it breaks below that level in any compelling way (espeically if it closes well below that level), it’s going to be very bearish. (Chart attached below.)

A lot has been written in recent days about the level of hedging that has been going on in the marketplace recently. We also have sentiment readings becoming quite bearish. No, they have not reached the kind of extremes we see at significant bottoms, but there is no question that sentiment has become bearish. Therefore, the market could see a multi-day (or even multi-week) bounce at any time. However, given that the Fed and other global central banks are engaging in an aggressive change in monetary policy…and that China is seeing renewed problems in their technology and real estate industries…and now that the situation in eastern Europe does not look like it’s going to subside in a substantial way any time soon…we think it is likely that January lows will be undercut before too long. With this in mind, we continue to believe that investors should use bounces to raise cash and add to defensive positions.

Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

TheMaleyReport.com

275 Grove St. Suite 2-400

Newton, MA 02466

617-663-5381

mmaley@millertabak.com

Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.