With only eleven trading days of 2022, the bond market is the worst start to a year in the past four decades. Investors are bracing for the first-rate hike in more than 20-years as early as March 2022 as the Fed fights rising inflation, which is close to a 40-year high.
Expectations are growing that the Fed may be behind in its fight against inflation. The Fed may need to quicken the pace of the tapering program but also be more aggressive in hiking rates, possibly with a 50-basis-point increase instead of the widely expected 25-basis-point hike.
Treasury bonds are off to their worst start in decades as yields have soared in the first 11 days of trading this year. 10-year US Treasury yield (TNX) has broken out above its Mar 2021 high (1.765%) and headed toward Nov/Dec 2019 highs at 1.949-1.971%. Tech Stocks and specifically aggressive growth stocks again came under intense selling as the Nasdaq Composite Index (COMPQ) plummeted another 2.60% today. Since its record high on 11/22/21, COMPQ has corrected 10.67%, pushing the decline into the all-important 10% threshold. The S&P 500 Index (SPX) has fared better, declining 1.84% today. It has now fallen a modest 5.19% from its 1/4/22 record high.
The discrepancies between Dow Jones Industrial Average, SPX Index, NYSE Composite Index, and the COMPQ/NDX continue to be a concern. The market breadth readings are also not as strong as before. However, as we move toward the mid-cycle phase of the stock market bull rally and the economic recovery/expansion cycle, it is common to see some market breadth divergence and higher market volatility. As long as the market discrepancies do not sustain for an extended timeframe, historically, the stock market can rally, albeit not at the high returns of the early expansion phase.
The SPX bull rally over the past couple of years has been impressive. The pertinent question is the recent market volatility and negative divergences a warning sign of a market top and the start of a bear market decline? Or is this another consolidation before the resumption of the bull trend?
The current correction over the past two months is strikingly similar to the four (4) previous market setbacks.
(1) Each of the prior corrections averaged around two months. The current Nov 2021 SPX correction is now approaching the two months window.
(2) Previous corrections also averaged 2-3 declines with declines around 4% to 5%. The current setbacks have spanned from 4.25% to 5.24%.
(3) All of the corrections fell to the bottom of the Bollinger Bands before recovering. SPX is currently testing the bottom of the Bollinger Bands at 4,576.
(4) The corrections also consistently whipped its 50-day ma, briefly violating its short-term moving averages before resuming its uptrend. SPX is currently trading slightly below its 50-day ma (4,678.95).
(5) The corrective phases did not violate the pivotal 200-day ma. The 200-day ma moving average is rising at 4,423.33 or over 153-points away. Although SPX may test the 200-day ma, it is still trading comfortably above this critical support.
(6) Except for the Sep-Oct 2021 correction, a series of higher-low patterns developed, including the current market setback. For example, 12/3/21 low is 4,495.12, 12/29/21 low is 4,531.10, and 1/18/22 low is 4,568.70.
Will the current three corrections of -5.24% (11/22-12/3/21), -4.25% (12/16-12/20/21), and -5.19% (1/4-1/18/22) alleviate an overbought condition and once again allow for the resumption of the primary uptrend?