The stock markets have now closed lower for the sixth Friday in a row, however, there was a reprieve on Friday which gives a glimmer of hope for a good open on Monday. Plus, next Friday is monthly options expiration (OPEX) for May and many times these weeks close out on a positive note as traders trim out their book with their options positions.
However, if we check in on the weekly chart of the S&P 500 we can see a closing price well above the low of the week. Ultimately, I think a more sustainable bottom would be built after hitting the 38.2% FIB and finally pushing the RSI on the bottom of the chart into oversold territory. Overall, there are many oversold readings and many stocks that have crashed over the last several weeks so a rebound is overdue.
If we move on to the NASDAQ (QQQ ETF) we can see this index has retreated farther than the S&P as it tagged the 50% FIB at the low of this week. However, we can also see that an oversold condition has yet to be created as seen at the pandemic low in March of 2020. Not a requirement but it would be a cleaner bottom with a cathartic whoosh to the downside and then a rebound (not yet).
If we are in the early days of a true bear market then there is a lot more downside to go for the stock market. Most bear markets can last 18-24 months and give up many years of gains during this period. The cause today are the tightening policies of central banks around the globe as inflation leaves no option other than to raise interest rates above the rate of inflation. For the stock market, this means that multiples will contract until the Fed gets inflation under control. For reference, the P/E multiple is now 20 on the S&P 500 and the long-term average is 16 so that may be where we are heading.
Chart of the Week!
Quantitative tightening is happening all around the globe and stock prices are beginning to reflect these restrictive policies.
Economic & Central Banking Snippets
- The April University of Michigan consumer confidence index fell to 59.1 from 65.2 last month which was the weakest read since August 2011. For perspective, the April 2020 low reading was 71.8 and the 2008 recession low was 55.3.
- The Cass Freight shipments index for April showed a 2.6% fall from March and down 0.5% compared to last year. Cass commented that “…..After a nearly two year cycle of surging freight volumes, the freight cycle has downshifted with a thud. It’s possible the April data include some indirect impact from lockdowns in China, but with container ship backlogs still off North American ports, the direct effects on finished goods imports seem more likely in the June/July timeframe. ….The prospect of freight recession is now considerable.”
- Fannie Mae’s Home Purchase Sentiment Index was released for April and it fell to the lowest level since May 2020 “as surveyed consumers expressed heightened concerns about housing affordability and rising mortgage rates”. According to The New York Federal Reserve, rising interest rates have sent mortgage refinance originations down 25% from a year ago.
- The Labor Department released its latest Consumer Price Index (CPI), showing inflation slowed to a monthly rate of 0.3% in April, down from 1.2% in March. The index’s annual rate showed prices were up 8.3% from a year ago, higher than the 8.1% economists had anticipated, but below March’s rate of 8.5%. The core CPI, which excludes volatile food and energy prices, increased 0.6% in April, after rising 0.3% the month before. In the 12 months through April, the core rate gained 6.2%, down slightly from a 6.5% rise in the previous month.
- The Producer Price Index rose 0.5% compared to April while the core rate was higher by 0.4%. Versus last year, the PPI is up 11% after 11.5% in March while the core rate was higher by 8.8% from 9.2%.
- Diesel costs are reaching new highs across the U.S., straining the operations of trucking companies and wrecking the transportation budgets of businesses that need to ship goods. The price of the fuel that powers heavy-duty trucks has increased by more than $1.50 a gallon in roughly two months, according to the U.S. Energy Information Administration. The national average price has climbed to $5.62 a gallon, setting a record for the second week in a row, as prices at the pump surpassed $6 in some markets.
That is all for now and thank you for being a subscriber!
President – Kisco Capital