Markets Close With a Warning Sign That Shouldn’t Be Ignored
The S&P 500 closed at the lows of the day for the first time since March.
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A weak bond market and a spike in interest rates provided an easy excuse for some profit taking on Friday.
Select technology names have been on a rampage recently and were ripe for selling, but the pressure spread to the entire market. Dip buyers tried briefly early in the day but gave way to increased pressure in the afternoon. The S&P 500 closed at the lows of the day for the first time since the bottom way back on March 27. A close at the lows of the day is a warning sign that should not be ignored.
The two-tiered action that has dominated recently continued in places but there was far greater emphasis on the downside. Breadth finished around 25% positive with 230 new lows against 100 new highs, which sounds more like a bear market than a bubbly bull market. Around 54% of stocks are now under the 200-day simple moving average.
Small caps were hit for 2.4%, the (SMH) was down 3.8% as the most extended group gave back the most, and the 20-year Treasury Bond ETF (TLT) was down 1.5%, confirming that the bond market was the source of the pressure and not a beneficiary of it.
Limited Rotation Tells the Story
The Equal Weight S&P 500 (RSP) lagged the cap-weighted (SPY) by a small margin, which reflected the broad selling. There were no clear signs of rotation other than Microsoft (MSFT) and Apple (AAPL), which finished with gains. The stocks that did not participate in the run from April were getting hit hard and are not viewed as bargains at this point. Cash was leaving the market rather than moving within it.
When the names that are not extended go down with the names that are, that tells us that multiples are contracting across the board and that is being driven by higher interest rates. With oil up another 3.5% on the day, the 10-year near a one-year high, and rate-hike odds back to a coin flip, that is the setup that pushes cash into T-bills and keeps it there.
There is no mystery about what is happening. Inflation worries have taken hold and a market that was overbought on narrow leadership found the excuse it needed for some selling.
Game Plan into Monday
The question now is whether dip buyers show up early next week or whether the selling builds. Two issues will be important. The first is whether the 10-year backs off 4.54% or pushes higher. The second is whether oil holds above $100 or rolls back. Both are major headwinds at the moment.
Nvidia (NVDA) reports Wednesday. The high bar coming into the report got a bit lower on Friday, but the setup has changed character. A stock coming off the highs into earnings is a different animal than a stock at the highs going in. The bar is lower, and the willingness to forgive any slowing is higher.
For the weekend, we need to watch for any news on the Iran war, any walk-back from the White House on the China summit, and any move in crude. We are at an important juncture and the news flow is favoring the bears.
Have a great weekend. I’ll see you on Monday.
At the time of publication, DePorre was long NVDA.
