US Equities Outlook:
- US stock markets are nearing their 2022 lows, and there are technical clues that suggest more pain may be ahead.
- Previous lows have been reached during ‘exhaustion’ events, when the VIX has spiked above 33 and VVIX has moved above 150; neither condition has been achieved yet.
- According to the IG Client Sentiment Index, the US S&P 500 has a bearish trading bias in the short-term.
Russia-Ukraine is a Convenient Narrative
The conflict in Eastern Europe is the story du jour, blamed for the recent leg lower in US equity markets. And while that may be true to an extent – there is certainly a risk-off tone across asset classes – the fact of the matter is that it’s a convenient narrative that papers over some of the more meaningful issues facing US stocks.
Three points come to mind. First, the Federal Reserve is on the cusp of an extremely aggressive rate hike cycle, with back-to-back-to-back 25-bps rate hikes coming in each of their next three meetings. Second, for the first time since 2Q’20, corporate earnings estimates have contracted, suggesting a more challenging economic environment muddled by multi-decade highs in inflation. And third, the US Treasury yield curve continues to flatten, suggesting weaker growth conditions moving forward.
The Russia-Ukraine conflict thus may be acting as an accelerant, but it is not the catalyst for all of the downside seen in stocks; the US Nasdaq 100, for example, was already down double digits in 2022 prior to war headlines on the Eastern front. Technical clues suggest that more downside may be ahead as exhaustion conditions have not been achieved in either the US Nasdaq 100 or the US S&P 500.
US NASDAQ 100 (ETF: QQQ; Futures: NQ1!) TECHNICAL ANALYSIS: DAILY CHART (October 2020 to February 2022) (CHART 1)
Rising interest rates, reduced earnings estimates, and weaker US growth conditions are proving a toxic mix for the tech-heavy Nasdaq. The recent sell-off has seen the symmetrical triangle, formed following the drop out of the year-plus ascending trendline, breakout to the downside. A breach of triangle support as well as the 50% Fibonacci retracement of the November 2021 low/January 2022 high range near 13855 suggests that a deeper setback to the area around 12894/13167 is possible (the May 2021 swing low; the 61.8% Fibonacci retracement of the November 2021 low/January 2022 high range; and the 38.2% Fibonacci retracement of the March 2020 low/January 2022 high range).
US S&P 500, VIX, & VVIX TECHNICAL ANALYSIS: DAILY CHART (October 2020 to February 2022) (CHART 2)
One reason to think that US stocks haven’t reached a meaningful low just yet is that there hasn’t been a ‘panic’ in markets like seen when previous lows were established. Since the November 2021 low in US equities, lows were formed when the VIX moved above 33 and the VVIX – the volatility of volatility index – moved above 150. Neither of these conditions have been achieved during the recent move lower, suggesting that an exhaustive, panic low has not been established thus far.
US S&P 500 (ETF: SPY; Futures: ES1!) TECHNICAL ANALYSIS: DAILY CHART (October 2020 to February 2022) (CHART 3)
Accordingly, with the US Nasdaq 100 setting fresh 2022 lows and volatility measures not showing signs of a panic sell-off yet, the US S&P 500 may soon follow to the downside. Following the symmetrical triangle breakout to the downside, momentum has turned firmly bearish. The US S&P 500 is below its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD has turned lower and is trending below its signal line, while daily Slow Stochastics are nestled in oversold territory.
Further losses into 4186/4212 area (the 2022 low; the 38.2% Fibonacci retracement of the November 2021 low/January 2022 high range; and the 23.6% Fibonacci retracement of the March 2020 low/January 2022 high range) are eyed in the very near-term. A breach of this support region would open the door for a deeper setback towards 4016/4029 (the May 2021 swing low; and the 50% Fibonacci retracement of the November 2021 low/January 2022 high range).
IG Client Sentiment Index: US S&P 500 Price Forecast (February 23, 2022) (Chart 4)
US 500: Retail trader data shows 59.00% of traders are net-long with the ratio of traders long to short at 1.44 to 1. The number of traders net-long is 5.06% higher than yesterday and 6.43% higher from last week, while the number of traders net-short is 2.68% higher than yesterday and 3.30% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests US 500 prices may continue to fall.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger US 500-bearish contrarian trading bias.
--- Written by Christopher Vecchio, CFA, Senior Strategist
