US Equities Outlook:
- A lack of follow-through to the topside after yesterday’s rally warns that ‘the low’ may not be in yet for US stocks.
- Recent selling has yet to produce an ‘exhaustion’ type of event, when the VIX has spiked above 33 and VVIX has moved above 150.
- According to the IG Client Sentiment Index, the US S&P 500 has a mixed trading bias in the short-term.
Inflation, the Fed, and Russia
Volatility has been the defining feature across all asset classes in recent weeks, catalyzed by the Russian invasion of Ukraine. And while it is certainly a convenient story for why US stocks have been weaker, it’s simply just an accelerant to an already deteriorating backdrop: the global supply chain is in disarray; commodity prices have surged, threatening both companies’ margins and consumers’ spending power; and central banks are pressing ahead with reducing stimulus and tightening monetary policy.
Until this fundamental narrative changes, it’s proving difficult for US equity markets to sustain a significant rally. Yesterday’s price action has seen no follow-through to the topside, with all major US indexes trading lower on the day. And without any evidence of exhaustion conditions setting in, it may be the case that there is further weakness ahead for both the US Nasdaq 100 and the US S&P 500.
US NASDAQ 100 (ETF: QQQ; Futures: NQ1!) TECHNICAL ANALYSIS: DAILY CHART (October 2020 to March 2022) (CHART 1)
It remains the case that “rising interest rates, reduced earnings estimates, and weaker US growth conditions are proving a toxic mix for the tech-heavy Nasdaq.” A new symmetrical triangle, formed since mid-February, which in the context of the preceding move lower, suggests more weakness ahead. Failure to retake the 50% Fibonacci retracement of the November 2021 low/January 2022 high range near 13855 suggests that a deeper setback is likely, to at least the February lows in the near-term; 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 March 2022) (CHART 2)
Unlike the low established in late-February that produced exhaustion conditions, we haven’t seen the same type of behavior unfold just yet. 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. In late-February, the VIX moved above 33 while the VVIX topped out around 145. For the time being, neither of these conditions have been met; ‘the low,’ defined by panic, has not been established.
US S&P 500 (ETF: SPY; Futures: ES1!) TECHNICAL ANALYSIS: DAILY CHART (October 2020 to March 2022) (CHART 3)
As such, with volatility measures not exhibiting panic just yet, the US S&P 500 finds itself in a similar position to the US Nasdaq 100, consolidating in a symmetrical triangle with a downside bias. Momentum remains bearish, despite yesterday’s rally. The US S&P 500 is below its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD continues to trend lower below its signal line, while daily Slow Stochastics have dropped back below their median line.
From here, a move back to the yearly low at 4101.75 seems likely in the near-term, which if lost 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 (March 10, 2022) (Chart 4)
US 500: Retail trader data shows 59.39% of traders are net-long with the ratio of traders long to short at 1.46 to 1. The number of traders net-long is 3.30% lower than yesterday and 4.40% lower from last week, while the number of traders net-short is 2.80% higher than yesterday and 14.35% 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.
Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed US 500 trading bias.
--- Written by Christopher Vecchio, CFA, Senior Strategist
