Morning Comment: Tighter financial conditions are bearish for stocks.....Justin Rose.

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It was another wild day for the stock market…as the NDX Nasdaq 100 index saw a full SIX different swings of more than 1% yesterday! The volatility in the S&P 500 was not quite as crazy, but it saw many big swings as well. Before mid-week last week, the stock market had not seen two down days in a row. Now we’ve seen that twice…with a two-day bounce in between…….By the end of the day yesterday, the stock market was decidedly lower (albeit above its lows for the day), so it does raise some concerns that the bounce from the mid-January lows has come to an end.

Of course, just because we’ve seen more down days than up days in the last week is not a major concern in and by itself. However, with the S&P 500 and the NDX Nasdaq 100 both falling back from their key resistance levels (their 100-DMA and 200-DMA respectively)…and with both indexes now within a whisker of experiencing a negative cross on their MACD charts…the yellow warning flags are being brought out. No, they haven’t been run up the flagpole yet, but the storm clouds are starting to build again on the horizon.

It was interesting that the S&P 500 closed at almost exactly the same level that it stood at 2:00…when the minutes of the most recent Fed meeting were released. The market had already come down over the previous day and a half due to Lael Brainard’s comments on Tuesday, so the market was prepared for some more hawkish comments on a very-short-term basis. However, we completely disagree with those who say this means that the Fed’s new (MUCH more hawkish) tightening policy is already “priced into the stock market” on an intermediate or long-term basis.

Yes, it can certainly be argued that their new policy has been priced into the credit markets…with the big rise in both short-term yields (including the fed fund futures)…and long-term rates. Heck, the yield on the 10yr note is up 72% YTD and more than 120% since August of last year! However, with the S&P down only 5% YTD…and with it trading at almost 20x forward earnings and almost 3x sales…the divergence between the bond and stock markets is far too large to think that the stock market has priced-in much of anything yet when it comes to the big shift in monetary policy that has taken place over the past 6 months or so.

As we have been saying for a very long time, the Fed KNOWS that what they’re doing will cause growth to slow and the stock market to go down eventually. We highlighted this last summer…when several Fed members included their concerns about the froth in the marketplace (on top of their inflation fears). So, the comments that former NY Fed President made yesterday about the stock market…is not a thought that should be new to our readers. The Fed’s goal is to tighten monetary conditions. You don’t have to be a PhD from Harvard or Princeton to know that is a bad recipe for many risk assets…NOT JUST the bond market.

We have also said for some time…and reiterated in our weekend piece last weekend…that what the Fed is doing in the right thing. Yes, they ARE going to inflict SOME pain on investors now…so that investors won’t experience A LOT MORE pain down the road. Don’t get us wrong, the Fed DID make a mistake. However, the mistake was to keep the emergency level of stimulus pumping into the system long after the emergency had passed. If they do not tighten aggressively now, they’d be compounding their original mistake. (Inflation would grow out of control…and risk assets would move into an even bigger bubble than they did in 1999/2000.) Therefore, they are doing the right thing…by picking the lesser of two evils.

People can ignore the writing on the wall…or they can embrace what is going on. Eventually, the stock market is going to react to what is going on in a more significant way…just like the bond market already has. In our opinion, those who embrace the situation will come out the other side in much, much better shape than those who don’t embrace it.

On the technical side of things, the S&P 500 has not been able to pull away from its key resistance level (its 100-DMA). Not only has it broken back below that line, but it has also fallen slightly below its 200-DMA as well (not shown on the attached chart). That said, if the market can bounce back immediately…and take out its 100-DMA in a significant way…it’s going to be very bullish. However, we’d note that the MACD chart on the S&P 500 is now within a whisker of a negative cross. Negative MACD crosses (at least significant ones) have been followed by significant declines in the stock market in the last year, so if we get one in the days ahead, it’s going to confirm that the short-term momentum for the stock market has turned down…….We get a plethora of “Fed speak” today, so if it’s anything like we’ve heard in the past couple of weeks, a negative cross is highly likely to take place before too long.

Finally, The Masters begins today. We frequently give a long list of tongue-in-cheek predictions just before the tournament begins…and then we make a real prediction about who will win. However, given how volatile the market is right now, we didn’t have the time to put one together this year……Therefore, we’ll just make a prediction on the winner. We predict that Justin Rose will win the Green Jacket this year. He has not been in top form, but he has shown flashes of brilliance several times. Also, he usually plays quite well at Augusta National. Besides, he is a gentleman in the truest sense of the word. Therefore, it would be fitting if he can win the tournament that the great Bobby Jones founded so many years ago.

Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Apr 07, 2022 — 9:04 AM
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