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Choppy Trading to Start the Year

On Thursday, stocks again declined on choppy trading as investors digest the recent pivot by the Federal Reserve toward a more hawkish stance. All three key US indexes finished lower, wiping out earlier intraday gains by the close. The S&P 500 Index (SPX – 4,696.05) fell 4.53 points or 0.10%. The Dow Jones Industrial Average (INDU – 36,236.47) declined 170.64 points or 0.47%. The Nasdaq Composite Index (15m080.86) dropped 19.31 points or 0.13%.


Markets kicked off 2022 with a jump in volatility soon after the release of the minutes of the Fed’s December 2021 meeting suggesting Fed officials intend to quicker the pace for raising rates this year.


The change in Fed’s stance sent the technology-laden Nasdaq Composite Index to post one of its largest one-day percentage drops since last February. The choppy trading continued today as the SPX Index and Nasdaq Composite Index closed down for the third consecutive day.


Nasdaq Composite has lost nearly 4.7% over the period. SPX has fallen 3.06%, and INDU has declined 2.03%. Many investors fear a pick-up in volatility for technology and growth stocks, which have driven the broad markets to record highs since the pandemic lows during March 2020.


So, are there technical damages incurred to key US indexes in the past few days?


The recent sharp jump in market volatility does not appear to have hurt the technical trends of the three dominant indexes. However, the Nasdaq Composite Index must begin to stabilize above its March 2021 uptrend (15,031), December 2021 lows (14,860-14,931), its pivotal 200-day ma (14,672). Violation here would warn of the start of a deeper and more extension correction.


SPX Index must also maintain its 50-day ma (4,672), the March 2021 uptrend (4,551), and the December 2021 lows (4,495-4,531). The intraday reversal yesterday (1/5/22) in the Dow Jones Industrial Average confirmed a negative outside day. Although this warns of a near-term pullback, INDU is still trading comfortably above the 50-day ma (35,800), the 200-day ma (34,841), and the December 2021 lows (34,007-34,665.50).


Beneath the surface, there have been technical divergences, including weaker market breadth and price momentum discrepancies. The recent market actions suggest investors may be rotating out of the high growth areas into more value and cyclical areas such as Financials, Energy, Materials, and Industrials.


Commodities-based sectors attract investment interests because of the higher oil and natural resources prices. Financials benefit from higher interest rates and anticipation of the Fed raising rates in March 2022.


The Energy sector (XLE – 60.51) has cleared its Oct/Nov 2021 highs. The S&P Financial Sector (XLF – 40.69) is close to confirming record highs above 40.66-40.90). The Industrial sector (XLI – 106.52) threatens to break out above its Nov 2021 highs at 107.24. The Materials sector (XLB – 89.38) has recently cleared its November 2021 high (89.72) but has slipped in recent days due to market volatility.


Are the choppy market conditions signaling an increase in market and sector rotations this year, at least from a near-to-medium-term basis?


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com


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