Financial markets continue to experience volatile swings. Will this change into the seasonality strength period from November to early January?
Several factors are creating the volatile swings. However, three specific catalysts will help decide the near-term directional trends of stocks.
One, the Fed remains a driver of stocks. Fed and Chair Powell’s hawkish stance continues to pressure stocks. Although there are signs the Fed will slow the interest rate hikes next year, the Fed’s desire to contain inflationary pressures will face political and international pressure as the tightening process can lead to a recession and higher unemployment.
Also, foreign central bankers may need to intervene at some point due to the devaluation of foreign currencies against the US dollar. Investors will continue to react to inflation, employment, and GDP economic numbers.
Two, the third quarter earnings season is more than halfway completed. 75% of S&P 500 companies that have reported have exceeded their estimates. It has not been all good news since the results of the earning beats have come from select S&P sectors, including Energy, Financials, Industrials, and Consumer Staples.
Economically sensitive sectors such as Consumer Discretionary, Technology, and large-cap growth areas continue to struggle. Future earning guidance remains lackluster for growth names. The trend will likely continue into the end of the year.
Three, higher market volatility is likely over the near term because of higher interest rates, global economic slowdown and recession concerns, uncertainties about central bankers’ monetary policies, and geopolitical fears.
However, market breadth may become increasingly important to confirm market bottoms and sustainable recoveries. It is not only the breadth of a single market that matters but the broadness of the recovery in key market indexes.
For instance, eight major stock market indexes account for the US stock market trading, including SPX, INDU, NYA, COMPQ, NDX, MID, SML, and IWC. The market bottom tends to develop when most indexes show signs of improvements or market capitulations.
A brief review show all of the indexes are in intermediate-term downtrends, as evidenced by the 50-day ma trading below the 200-day ma. Also, the indexes continue to trade below their respective Nov 2021/Jan 2022 primary downtrends.
However, it is constructive that six (6) market indexes show signs of near-term improvements.
For instance, Dow Jones Industrial Average (INDU) has the best-looking chart, as evidenced by its ability to trade above its 50-day ma of 30,882 on 10/24/22. Yesterday’s surge above the pivotal 200-day ma (32,554) also reaffirms its leadership role. The next challenge is to surpass the Jan 2022 primary downtrend (33,314) and preferably reverse a lower-high pattern via a convincing breakout above the 8/16/22 high at 34,281.
The S&P 500 Index (SPX), NYSE Composite Index (NYA), S&P 400 Midcap Index (MID), S&P 600 Small cap Index (SML), and Microcap ETF (IWC) show some improvements as they have cleared their respective 50-day ma. However, as long as the indexes are below their 200-day ma, they are still vulnerable to selling.
The next challenge is to maintain their respective 50-day moving averages on pullbacks and surge convincingly above their 200-day moving averages at 4,088 - SPX, 15,362.5 - NYA, 2,578.5 -MID, 1,215.5 - SML, and 116 - IWC.
To solidify bottoms, the indexes must also clear above their primary downtrends at 4,191 - SPX, 15,875 - NYA, 2,563 - MID, 1,255 - SML, and 121 – IWC, and surge above their Aug 2022 reaction highs at 4,325.28 - SPX, 15,897.67 - NYA, 2,646.02 - MID, 1,303.48 - SML, and 126.72 - IWC.
The Nasdaq 100 Index (NDX) and the Nasdaq Composite Index (COMPQ) continue to struggle to clear above their respective 50-day moving averages (11,490 - NDX and 11,068 - COMPQ) and the Oct 2022 highs (11,660.5-11,682 – NDX and 11,210-11,230.5 – COMPQ).
At the minimum, both OTC indexes must clear above the two initial resistances before they have any chance of generating oversold rallies. Formidable intermediate-term resistances reside along the 200-day moving averages (12,773 - NDX and 12,266 - COMPQ) and the Nov/Dec 2021 primary downtrends (12,792 - NDX and 12,291 - COMPQ).
NDX and COMPQ are underperforming equity counterparts due to higher interest rates and heavy concentrations of growth and mega-cap technology names (i.e., AAPL, MSFT, GOOGL, AMZN, META, TSLA, etc.).
Although market indexes are showing near-term improvements, the question remains – can there be a sustainable market bottom and, most importantly, an intermediate-to-longer term US stock market recovery if the large-cap technology indexes continue to lag?