On Groundhog Day, Wednesday, February 2, Punxsutawney Phil saw his shadow, predicting that there will be at least six weeks of winter weather ahead of us. Given the market action of the last few days, can we expect inclement weather ahead for market bulls as well?
Last week, I warned readers to expect the stock market to bounce. It did, retracing 50% of the market’s decline in about four days. I also warned that investors should not get comfortable with this bounce because after the bounce, markets should go south once again. That prediction seems to be playing out.
It would be an understatement to say that markets remain volatile both in the stock and bond markets. Commodities, the currency, and crypto markets are also gyrating like a championship bronco.
Part of the problem lies with the FANG stocks. These large-cap mega companies account for so much of the major averages and indexes, that when one or another of these stocks catch a cold, the markets catch pneumonia. Most recently Meta (formerly known as Facebook) missed earnings and gave poor guidance on Wednesday night. The stock dropped more than 22% overnight. It was the single largest loss of dollar value for a public company in U.S. history. All the major averages declined with it, with the NASDAQ falling 2.25%, while the S&P 500 Index fell almost 1.5%.
Just the day before, Alphabet (Google) did the opposite, gaining 20% on stellar earnings and took the indexes for a major rise upwards. On Thursday, Amazon surprised investors with what looked like a massive beat on earnings and gained 11% in overnight trading. At first, the U.S. indexes traded more than a percentage point higher but gave that all back by the opening on Friday morning. So did the markets.
Overall, corporate earnings have held up with roughly 75% beating numbers, but down from 82% last quarter. The size of the beats, compared to the last few quarters, have been anemic, while the number of revisions upward in future earnings have been few and far between. Obviously, none of this has been enough to hold up the stock market, let alone propel it higher. More than a month ago, I warned investors that that would turn out to be the case.
The Omicron variant is evidently not taking its toll on the job market yet, according to the latest payroll numbers. Friday’s employment numbers saw 467,000 job gains versus the forecasts of only 110,000 gains.
Investors, rather than celebrate the job gains, saw them as proof that inflation is still climbing, Wages, a key element of the inflation equation, continued to move higher. The Ten-year U.S. Treasury bond spiked higher on the news to more than 1.90%. My target, as I have advised investors in the past, is a 2% yield on the “Tens” in the short-term.
But let’s get to the meat of this column—the markets, where to now, given that my forecast that the markets would see a 10-20% correction between mid-January and February. That prediction has been accomplished at this point. I also signaled that we would bounce this week and we have. At its height, the bounce retraced 61% of the losses on the S&P 500 Index. But I also warned that we should not get too comfortable with this bounce. The last two days brought this point home to those who doubted that warning. Now what?
The stock market took less than half the time to recoup 61% of its losses. Since then, the volatility has exploded both up and down. In situations like this, we can expect to see a large “W” pattern in the market’s behavior. We are about halfway through this pattern. At a bare minimum, we should see the markets (S&P 500 Index) retest their recent lows (4,222) on January 24, 2022. But it doesn’t have to stop there. As I wrote two weeks ago, we could see a decline to 4,070 if investors begin to panic. But we could also see a higher low as well.
Given this potential scenario, I don’t believe it is time to be a hero. If we retest the recent lows, sure, put a little money to work, but don’t bet the house. From there, if it goes lower, start averaging in. The same maneuver could be applied on the upside, if 4,222 is truly the bottom. How will you know? Keep reading…