A significant selloff of any amount [especially when stocks have been in bull mode] always leads to the same question… Is it time to sell stocks? I received quite a few questions via phone call, email and texts asking that very question Friday.
The short answer? Depends… I know, everyone hates it when I answer like that. But it’s true. If you’re looking to get short, I’d definitely pass as I don’t suggest price behavior traders get short on an initial thrust to the downside.
For positions you own and want to sell? It also depends… If you’ve achieved your target, close the trade. If you have a trailing stop< you have to wait for price to fall back to that level.
In other words… follow your simple rules. I know you’ve never heard that from me before.
More broadly re the market, stubborn inflation is driving a lot of uncertainty both for the Fed and investors, as everyone is being forced to dial back rate cut expectations. After Wednesday’s report, Fed funds futures are now pricing in a less than 20% chance of a cut in June, down from more than 50% on Tuesday. The Fed’s (first) rate cut is now only fully priced for November, which seemed unthinkable at the start of the year when the consensus was that the US central bank would reduce rates by 150 basis points. Further, there is a growing camp that believes the Fed may not cut at all this year.
Executive Summary
Last week’s market sent relatively mixed messages and ended on a bearish note.
The Nasdaq looked like it was set to rocket higher after Thursday as Nvidia (NVDA) and other megacap and AI stocks rebounded from earlier in the week.
The S&P 500, Dow Jones and Russell 2000 struggled from a crazy hot inflation print combined with Mideast tensions.
The CBOE Volatility index [VIX], the market “fear” gauge, spiked Friday to its highest levels since late October 2023 amid worries that Iran will finally follow through and directly attack Israel
The movement of safe haven Gold [GLD] continues to suggest the same.
Disappointing JPMorgan Chase (JPM) guidance, a big Arista Networks (ANET) sell-off and China woes for Intel (INTC) and Advanced Micro Devices (AMD) took a toll too.
All of that spurred a risk-off shift, especially heading into the uncertainty of the weekend.
Key Earnings Ahead - Goldman Sachs (GS) and Charles Schwab (SCHW) report early Monday. Chip stocks also have important earnings coming next week.
Last Week
The long-running stock market rally had a tough week on a hot CPI inflation report and Mideast fears, with Friday's losses wiping out Thursday's explosion higher. The Nasdaq fell 1.6% in Friday's trading to end the week with a negligible 0.45% loss.
The rest of the market looked worse.
The S&P 500 index sank 1.55% for the week, below the 21-day [see chart below]. The benchmark index closed just above its 50-day line but below its 10-week.
The Dow Jones Industrial Average slumped 2.4% to the lowest level since late January and appears to have only really been saved by the 100 EMA on the daily chart. The small-cap Russell 2000 followed course shedding 2.9% to the lowest level since late February and also bounced near its 100 EMA.
Inflation indicators Crude oil fell 1.4% to $85.66 a barrel for the week, backing off Friday's intraday high of $87.67. Gold climbed 1.3% to $2,356.20 an ounce, also well off Friday highs.
The 10-year Treasury yield leapt 12 basis points to 4.5%, with Thursday's peak of 4.59% a five-month high. Traders only see a modest chance of a Fed rate cut in June and are only leaning toward a move in July.
Stock Market Fear Gauge Soars
The CBOE Volatility [VIX] index shot up 16.1% to 17.31 on Friday, with the session peaking at the highest level since late October. The excessive fear indicated by the move could foreshadow at least a short-term bottom. But the market fear gauge is still well off its October peaks, to say nothing of its Covid highs, so there’s no guarantee of that floor.
Another sentiment gauge, the CNN Fear & Greed Index [seen below], was off its bullish extremes last week, but had managed to remain at a bullish level heading into this past week. That bullish posture has softened even more. It is worth noting that furtherance of the direct Iran-Israel conflict [which could draw in the U.S.], could trigger a far-larger fear spike and a big retreat from equities.
After Thursday's strong action, the expectation was that the market would continue to rise, especially the Nasdaq and leaders such as Magnificent 7.
Instead of advancing further or digesting in a flat range, there was a big retreat Friday. A direct Iran-Israel conflict is a wild card [which we now know has come to fruition] hurt sentiment, while JPMorgan [JPM]
and Arista [ANET]
didn't help. And while Treasury yields fell on Friday, the weekly surge — and pushing Fed rate cuts further back — is a broader headwind.
Whatever the reason, this is still a sideways market for the Nasdaq, and such markets are always tough for short-term traders to handle. For the Dow and Russell 2000 — and perhaps the S&P 500 — it's looking more and more like a pullback or deep correction.
Traders have to reassess after Friday and last week. If you took new long positions on Wednesday/Thursday, you’ll likely be stopped out, but remember… being stopped out is a good thing, especially when it’s tight [small risk] and fast.
As ever, it's a good time to be working on stalk lists. If the drumbeat of war fades and upcoming earnings are received positively, you'll want to be ready.
Weekly Performances:
US Dollar +1.66%
Bitcoin/USD -3.35%
2 Yr Treasury Note +2.77%
10 Yr Treasury Note +3.11%
Brent Crude Oil Futures +.78%
Gold Futures +.47%
JNK -.50%
Alternative Energy -.17%
DJIA -2.37% - Old line companies seemed to fare poorly last week. Notice the performances of XLF, XLV, XLI, XLB, and XLRE below.
S&P 500 -1.56%
Nasdaq Composite -.45%
XLF [Large Financials ETF] -3.63%
XLK [Technology] -.50%
XLC [Communications Services] -1.44%
XLY [Consumer Discretionary] -.97%
XLP [Consumer Staples] -1.28%
XLE [Energy] -1.99%
XLV [Health Care] -3.01%
XLI [Industrials] -2.20%
XLB [Materials] -3.07%
XLRE [Real Estate] -2.97%
XLU [Utilities] -1.47%
Market Internals
VIX Close 17.31 [VIX lifted off its lows… + almost 8% Friday alone]
52 Wk Highs 84
52 Week Lows 246 [Outsize lows for the week]
% Stocks abv 200 Day Avg 55.06%
CNN Business Fear & Greed Index: 46 [Remember it was still in the greed window last week]
Earnings Next Week
Goldman Sachs [GS] fell below its 50-day line on Friday. That said, you might want to avoid the short side until price has taken out support around $300.
Schwab [SCHW] actually held up pretty well, all things considered. But the structure of Schwab suggests something closer to a down trend.
A Couple of Semi Earnings
Dutch chip-equipment giant ASML reports Wednesday morning and chip foundry giant Taiwan Semiconductor is due early Thursday.
Analysts expect ASML earnings to tumble in Q1, but see a recovery in the second half. Taiwan Semi earnings are expected to be flat, though unofficial targets may be higher after the foundry giant reported better-than-expected Q1 sales on April 10. ASML stock fell 1.8% to 961.84 last week, closing right around the 50-day and 10-week lines. It now has a flat base with a 1,056.34 buy point. Traders could use a trendline entry around 1000 to start a position off the 10-week, or the April 1 high of 1002.66.
Taiwan Semi is benefitting from strong demand for AI and other advanced chips. TSMC's [TSM] guidance on earnings and capital spending will be key for the industry. TSM stock rose 0.85% to 142.56 for the week. Shares have been consolidating for a few weeks, but need another week for a proper base. Traders could use the April 10 high of 148.43 as an entry if Taiwan Semi stock rallies on earnings.
TAOST Stalk Idea Of The Week — Chord Energy Corporation [CHRD] appears to be benefitting from the behavior of Crude Oil.
That’s it for today. Have a good week.
E