Remember When We Cheered a Strong Economy? That's So Last Year
The market mood has shifted 180 degrees — and the indexes and Magnificent Seven are finally catching up to what's happened with the rest of the market.
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For a second time this week, the market was hit hard by inflationary economic news. On Tuesday, there was a surprise jump in costs related to services. On Friday it was much higher than expected growth in jobs during December and a decline in the unemployment rate.
Following the election in November, the market celebrated the strength of the economy, ignored inflation, and was optimistic about a friendly Fed and Trump policies. The mood has shifted 180 degrees this week, and now, strong growth is viewed as negative because it creates inflationary pressures. There are worries that Trump's policies could cause even more inflation.
The bond market has been worried about economic conditions for a long time and started declining very soon after the last Fed cut. The bond market is saying that the Fed made a mistake with the last rate cut, and higher interest rates are the proof.
A lot of people are acting like this poor market action just started on Tuesday. If you look at equal-weighted indexes and small caps, it started at the end of November after a three-week rally following the election. Only about 40% of the stocks in the market are over their 200-day simple moving average, and the number of new lows jumped to over 600 names on Friday.
What is happening this week is that the indexes and Magnificent Seven names are finally catching up to the downside with the rest of the market.
The good news is that there is already a very deep correction in many stocks. The Magnificent Seven and big-cap technology are vulnerable to more downside because they were so much more extended than everything else but there are a lot of stocks that are washed out and should enjoy some good bounce action when things turn back up.
Earnings season starts next week with banks, and then, a week from Monday, Donald Trump will take office and is likely to release a flood of executive orders that will cause a strong market reaction.
I don't know if the market is going to keep trending lower or not, but I do know we are likely to have a very high level of volatility.
Have a great weekend. I'll see you on Monday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
