Worst trading day since June 2020
Investors waited patiently for Tuesday’s publishing of the Consumer Price Index (CPI) data since it was the last economic number before the FOMC meeting next week.
Inflation and the Fed monetary policies continue to influence the financial markets as investors fear the rate hikes and higher interest rates will lead to a recession or the start of a stagflation cycle.
CPI gained 8.3% in August on a year-over-year basis. Although CPI slipped from 8.5% in July and 9.1% in June, the month-to-month CPI numbers showed inflation accelerated in August.
Stocks sold off sharply after the higher-than-expected inflation data signals the Fed will likely continue with its aggressive rate hikes into the end of the year and next.
Stocks suffered one of the steepest one-day declines in more than two years (since 6/11/2020) as financial assets, including stocks, bonds, and commodities, plummeted. All 11 S&P sectors fell, declining from 2.5% to 5.5% today. All 30 Dow Jones Industrial Average stocks were down for the day. Only 5 S&P 500 names finished the day in positive territories.
The S&P 500 Index declined 177.72 points or 4.32%, leaving it down 17 for the year. The Dow Jones Industrial Average also fell 1,276.37 points or 3.94%, down 14% this year. Nasdaq Composite Index plummeted 632.84 points or 5.16%, down 26%, so far this year.
Technically speaking, it was a bearish day across financial markets.
US Dollar Index (USD) traded sharply higher, gaining 1.49 points or 1.38%, trading at 20-year highs as money sought the safety of the benchmark currency.
The 10-year US Treasury yield (TNX) nears pivotal resistance at 3.483%, coinciding with the Jun 2022 high. Above 3.5% reaffirms a breakout and suggests a rally toward 3.75-4.0% (2009, 2010, and 2011 highs).
The VIX implied volatility index jumped 3.40 points or 14.24%, suggesting fear is returning. VIX traded above its 50-day and 200-day moving averages and headed toward the upper-30s to low-40s to retest the late-2020, 2021, and 2022 highs. Clearing above this resistance zone confirms a critical breakout.
After stock market indexes briefly traded above their respective 50-day moving averages, today’s actions quickly erased any hope of indexes sustaining near-term recoveries as most indexes fell back below their 50-day ma. The convergence between the 50-day and 200-day moving averages warns of a rolling bear market. A confirmation can lead to a structural bear.
A large gap-down appeared in popular stock market indexes today. The two-prior gap-ups followed by today’s gap-down warn of a bearish island reversal pattern. The daily reversal formation is an ominous warning of an impending market sell-off. Watch for a retest of the 9/6/22 low. Violation here opens the door for a retest of the Jun/Jul reaction lows. A breakdown of the pivotal support reinforces the resumption of the primary downtrend.