Geopolitical tensions in China and comments from the Fed officials led to stocks suffering one of the sharpest one-day selloffs since the beginning of the month.
The protest in China against China’s zero Covid policy has many investors fearing slower global growth as most equity indexes across Asia fell. The concerns spilled over into the commodity markets as WTIC Crude fell below the mid-$70s per barrel intraday before recovering toward $77.24.
Investors started the week by selling as Fed officials warned of more interest rate hikes to contain inflation. Another Fed official stated the unemployment rate needs to climb to as high as 5% by next year due to further rate hikes.
The S&P 500 Index (SPX – 3,963.94) declined 62.18 points or 1.4%. The Dow Jones Industrial Average (INDU – 33,849.46) fell 497.57 points or 1.45%. The Nasdaq Composite Index (COMPQ – 11,049.50) dropped 176.86 points or 1.58%.
The uncertainties in China and the continued aggressive stance from the Federal Reserve will likely lead to further market volatility as investors worry about interest rates, inflation, recession, and global growth. The 10-year Treasury yield (TNX) briefly traded to 3.684%, reaching its lowest since October.
The divergences between US equity indexes, specifically between the narrowed-based index, INDU, outperforming the broader-based US indexes (i.e., SPX, NDX, and COMPQ), suggest investors favor defensive areas.
The rotations out of growth, technology, and economically sensitive consumer discretionary stocks and into defensive and value areas such as staples, utilities, healthcare, industrials, and financials suggest a narrowed-based and cautious market environment.
While it is constructive that INDU has broken out above critical resistance, corresponding to the 200-day ma (32,469), Jan 2022 primary downtrend (33,126), and the 61.8% retracement (33,785) from the Jan 2022-Oct 2022 decline, the competing indexes, including SPX, COMPQ, and NDX have not done so.
Do the divergences in market indexes show a lack of market breadth and warn that the mid-October 2022 rally is another oversold rally within the primary downtrend?
There is also formidable INDU resistance at 34,118-34,386.5, coinciding with the May, Aug, and Nov 2022 reaction highs. Failure to convincingly surge above the resistance coupled with a violation of support below the extension of the Jan 2022 downtrend (33,075) and the 50-day/200-day moving averages (32,469/31,458.5) warns of an INDU top.
On a positive note, a 7-month head and shoulders bottom pattern may be developing. Can INDU breakout above neckline resistance at 34,118-34,386.5?
Although the seasonal buying period toward the end of the year can continue, resulting in stocks trading higher, the primary trends remain bearish for most stock market indexes.
Once the seasonality strength fades into the New Year, will the primary downtrends resume?
Are investors preparing for another market downturn by rotating into the defensive, income, and value-related areas such as Healthcare (XLV), Consumer Staples (XLP), Utilities (XLU), S&P Large Cap Value ETF (IVE), Industrials (XLI), and Financials (XLF)?
Will this defensive rotation sustain if a recession occurs next year?