One of the most bullish things a market can do is to get overbought and stay that way. Conversely, one of the most bearish things a market can do is get oversold and stay that way.
Those who have been tracking daily sentiment indicators such as the CNN Fear/Greed Index, and market internals, know that stock markets in general have been in oversold territory for two weeks now with nary a bounce of significance. Every attempt has been turned back at the key overhead moving averages.
If a stock or a market is not doing what is expected, then an exit to the sidelines is in order. Sometimes discretion is the better part of valor when it comes to commitment of capital, as well as other aspects of life.
One has only to look at the long downtrends and the unceasing pressure on China technology shares here in the US, and in the Hong Kong markets to understand that a reassessment of foreign risk is going on. Traders and investors are voting with their feet.
Speaking of voting with one’s feet, insiders and investors have been selling down the shares of the top pandemic vaccine manufacturers. When news comes out that is bullish as to more orders or new booster requirements, the buying tends to be limited and selling ensues shortly afterward. Not a good look.
There were no big surprises from the Federal Reserve as the FOMC raised the target fed funds rate by 25 basis points (.25%) with a view of hiking every meeting by the same amount for the rest of the year and into 2023 for a total of six. Markets appeared nonplussed but gathered steam towards the close, as news hit from the Financial Times that a deal might actually be imminent for an end to the war in Ukraine.
Based on our master cycle, we had been looking for a significant tradeable high to occur on March 15th plus, or minus one trading day with a low to occur at the end of month (the 28th?) Cycles do become inverted from time to time and what was expected as a low sometimes comes in as a high and vice versa. Given the extreme oversold nature of equity markets, peace breaking out has the potential for a ripper of a short covering rally. For now we will stick with our cycle forecast.
Crashes are rare birds, but with that being said, we have a potent mix of market internals, sentiment, and geo-political risk that can in combination create a waterfall decline. We remember the market break of 1987. The Fed had been raising interest rates into a cooling economy, and there was recent legislation in Congress to limit the tax benefits of doing leveraged buyouts which put certain announced deals into question and so some fell apart as a result. As the market dropped the week ahead of the breakdown, portfolio insurance kicked in and the selling begat more selling. The selling fed on itself. On that Monday morning the market was in an extreme oversold position, stocks were down in the pre-market, but it didn’t look like the wheels would come off the cart and trade would be normalized at lower levels. But then news crossed the wires that President Reagan had authorized and executed an attack on Iranian oil platforms in the Persian Gulf. In traders’ minds, the U.S. was at war potentially. That was the catalyst that sent the futures spiraling south pre-market open. Could something similar happen today?
Stay wary and stay safe.
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