Strategist says market could become a 'meat grinder of desperate hope'

Investors could get a reprieve from the sharp sell-off in stocks in the coming week

A trader works on the floor of the New York Stock Exchange (NYSE) in New York City on May 5, 2022.

andrew kelly | Reuters

Investors could get a reprieve in the coming week from the vicious selling cycle that has gripped the stock market since late March.

Stocks rebounded from Thursday’s lows and were expected to exit the week with reduced losses after Friday’s rally. On Friday, buyers searched for bargains among small caps, biotech names, ETF Arkk Innovation and other growth names that have been hardest hit.

The S&P 500 jumped above the key 4,000 level on Friday, after touching 3,858 on Thursday – near the 3,800-3,850 area that chart analysts were targeting for a bottom. But while it looks like the market might rebound temporarily, market technicians say this zone will likely be tested again later.

“Does that mean the lows for the year are here? Probably not, but it could create an oversold bounce to retest the 4,100 or 4,200 level in the S&P 500,” said Scott Redler of T3Live.com, which tracks short-term market trends. techniques. “In bull markets, you get weeks when you pull back. In bear markets, you get oversold bounces.

Redler said he expects traders to try to sell the rally. On Friday, the Nasdaq jumped 3.8% despite being down 2.8% for the week, and the Dow Jones was up 1.5% but down 2.1% for the week. The S&P 500 ended Friday at 4,023, up 2.4% but down the same amount for the week.

“It contains the ingredients for an oversold rebound that could last longer than a week. I think this rebound will be led by all the oversold names that are down 70% to 80% from their highs,” he said. he declared. “That doesn’t mean you can buy blindly. Not everything will be created equal in this rebound.”

Redler said the fact that the Federal Reserve won’t meet for a few weeks could add some support to stocks. Markets fear the Fed is raising interest rates too quickly and stifling economic recovery as it tries to stifle inflation.

Over the coming week, investors will continue to look for clues to the path of the central bank’s interest rate hike in economic reports and comments from Fed officials.

Fed Chairman Jerome Powell is scheduled to speak at a Wall Street Journal conference on Tuesday afternoon. For now, the market is expecting a half-point interest rate hike at the June meeting and another in July, with perhaps a third in September. The central bank raised its target federal funds rate by half a point this month, following a quarter-point hike in March.

Consumer health will be the focus of concern over the coming week. The economic calendar includes April retail sales and also a look at the housing sector, with the National Association of Home Builders survey; both reports are due out on Tuesday, with housing starts on Wednesday and existing home sales on Thursday.

Walmart, Home Depot and Target are expected to report earnings next week, and these big chain stores could provide some good insight into the impact of inflation on consumer spending and attitudes.

Almost a bear market

Perhaps the most telling thing for investors over the coming week will be how the stock market is trading after its efforts to rebound on Friday.

The S&P 500’s decline to 3,858.87 on Thursday sent the index down 19.55% from its peak on an intraday basis — very close to the official 20% drop for a bear market.

The relentless rise in bond yields has also slowed, after the 10-year yield peaked last week at 3.2%. The 10-year was at 2.93% on Friday.

“I think what’s most encouraging to me is that the rate rout has come to a halt. Throughout the year, short-term yields pushed 10-year yields higher,” he said. said Jim Paulsen, chief investment strategist at Leuthold Group. He noted that inflation expectations in the bond market have also receded and that reduced pressure from the rates market could help equities rally. Yields move opposite to bond market prices.

Fairlead Strategies founder Katie Stockton said the slowdown in the rise in the 10-year yield is significant. For the economy as a whole, the 10-year trend from around 1.5% at the start of the year has already had an impact on housing, as residential mortgages are influenced by it.

For equities, technology and growth names were the hardest hit by rising treasury yields. This is because higher rates make silver more expensive and cheap money is the fuel for high value stocks.

“I think 10-year yields are just going to be stuck here,” Stockton said, noting that his view is purely based on chart analysis. “Such a steep uptrend is not sustainable. … We think there is going to be some consolidation in Treasury and dollar yields.” She said support for the 10-year is at 2.55% and resistance on the upside is at 3.25%.

Paulsen noted that a lot of speculation has been pulled off high-tech and large-caps. “Look at FANG stocks dropping from 14% of market cap to 9%. Much of the tech bloodletting is over,” he said.

Investors were also watching Apple last week after breaking support at $150. The stock has outsized influence in the market, as it is the largest US company by market capitalization and is a constituent of the Dow, S&P 500 and Nasdaq.

Apple stock fell just below Stockton’s target of $139 on Thursday, but rallied on Friday, closing at $147.11 per share.

Stockton said its chart analysis signaled the market could experience about two weeks of stabilization, either with a bounce or sideways movement. “This is not a buy signal. I don’t recommend people buy.”

There could be an oversold bounce, “and we generally expect to use that oversold bounce to reduce exposure,” she said.

Her S&P 500 downside target was 3,815, and she said it was still in play. “We have to assume it will be a retest,” Stockton said. “The new test is more likely to give a breakdown as the momentum is still down.”

Calendar for the coming week

Monday

Earnings: Warby Parker, Take-Two Interactive, Tencent Music, Ryanair, Weber

8:30 a.m. Empire State making

8:55 a.m. New York Fed President John Williams

4:00 p.m. ICT data

Tuesday

Earnings: Walmart, Home Depot, Vodafone, JD.com

8:00 a.m. St. Louis Fed President James Bullard

8:30 a.m. Retail

8:30 a.m. Business inventories

9:15 a.m. Patrick Harker, President of the Philadelphia Fed

9:15 a.m. Industrial production

10:00 a.m. Business inventories

10:00 a.m. NAHB survey

2:00 p.m. Fed Chairman Jerome Powell at a conference sponsored by The Wall Street Journal

2:30 p.m. Loretta Mester, Cleveland Fed President

6:45 p.m. Chicago Fed President Charles Evans

Wednesday

Earnings: Target, Cisco Systems, Lowe’s, TJX, Burberry, Tencent Holdings, Analog Devices, Shoe Carnival, Bath and Body Works, Synopsys

8:30 a.m. Start of housing

8:30 a.m. Building permit

4:00 p.m. Philadelphia Fed Harker

Thusday

Earnings: BJ’s Wholesale, Applied Materials, Deckers Outdoor, Ross Stores, Palo Alto Networks, VF Corp, Eagle Materials, Kohl’s, Grab Holdings, Vipshop

8:30 a.m. Initial Claims

8:30 a.m. Philadelphia Fed Manufacturing

10:00 a.m. Existing home sales

10:00 a.m. Advanced Index

4:00 p.m. Philadelphia Fed Harker

Friday

Earnings: Deere, Foot Locker, Booz Allen Hamilton

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