Major market indexes started the year off on a very bad foot as the NASDAQ Composite Index busted its 50-day moving average on Wednesday while the S&P 500 Index reversed back below the 4700 level on what is now a failed breakout to new highs. The breakout was suspect on a number of levels as we've discussed in recent Focus List Reports. The market is now back in a correction as the NASDAQ tests the prior December lows and the S&P attempts to hold critical support at the 50-dma.
The market break is no doubt related to the market's concerns that the Fed is behind the curve when it comes to addressing inflation. Despite a weak jobs number on Friday where the Bureau of Labor Statistic reported 199,000 new jobs vs. expectations of 440,000, interest rates rose with the 10-Year Treasury Yield ($TNX) posting its highest levels since the pandemic began in March of 2020. The market's reaction to a weak jobs number appears to indicate that it foresees stagflation on the horizon - a slowing economy combined with higher inflation. This is not a favorable environment for stocks, and we have seen high-PE/infinite-PE stocks get slaughtered this past week as a result. Higher interest rates will likely lead to PE-compressions across many sectors, so despite some movement into lower-PE industrials and stuff-stocks this past week, this will likely spread throughout the market once what we see as a defensive rotation into lower-PE names runs its course.
The Market Direction Model (MDM) moved to a CASH signal on Monday, January 3rd.
Bitcoin (BTCUSD) is now living firmly below its 200-day moving average. As noted in previous Focus List Review reports, the "Big-Crypto" crypto-currency has triggered several short-sale entries along the way after topping out above $68,000 amid much hype and fanfare in November.
Ethereum ($ETHUSD) has triggered another short-sale entry as it breaks below its 200-day moving average. Selling volume was heavy. What investors need to face is the likelihood that the entire move in crypto-currencies was just another corollary to the highly-speculative FOMO bubble that the Fed and the government, via "stimmie checks," created across several asset classes, including stocks, crypto-currencies, and real estate, for example. Thus the selling carnage could get worse, and we would not assume that there is intrinsic value in any crypto-currencies that puts a floor underneath their prices in the near-term. Keep in mind this applies to many investment vehicles since one only need look to other historic corrections such as 1929, 1987, 2000-2002, 2008, and March 2020 to see that most assets can undergo devastating collapses in price.
Qualcomm (QCOM) has broken below its 20-dema, triggering a short-sale entry. As discussed in a previous Short-Sale Set-Up report, we would watch for a decisive breach of the 20-dema as a short-sale entry trigger in a continued market correction. This remains in a short entry position here using the 20-dema as a covering guide.
Applied Materials (AMAT) reversed back below its 20-dema on Friday, triggering a short-sale entry per our Short-Sale Set-Up report of Wednesday, January 5th. It ended Friday just below the 50-day line which triggers a second short-sale entry using the 50-day line as a covering guide.
KLA Corp. (KLAC) closed just below its 20-dema on Friday. This keeps it in a short-sale entry position using the 20-dema as a covering guide.
Lam Research (LRCX) decisively busted its 20-dema on Friday, triggering a short-sale entry at that point per our Short-Sale Set-Up report of Wednesday, January 5th. It is now extended on the downside as it heads for a test of the 50-day moving average. Watch for any break below the 50-day line as a possible secondary short-sale entry trigger whereupon the 50-dma serves as a covering guide.
The great tell about the current market is found in the NASDAQ Six, the six big-stock NASDAQ names that together comprise nearly half of the NASDAQ 100 Index weighting. After this past week, however, those weighting have likely dropped. All six are now breaking down in earnest, with Apple (AAPL) the only one left in a reasonable short-sale entry position just below the 20-day exponential moving average which would then serve as a covering guide.
As we've noted in recent reports, the recent breakout in the S&P 500 was suspect on a number of levels, particularly with respect to breadth, new highs vs. new lows, and the percentage of stocks trading above their 50-day moving averages. Even as the S&P pushed to all-time highs at the end of 2021, the percentage of NASDAQ stocks trading above their 50-day line was well below 30%, not something you would expect to see in a market where one of the major indexes is posting all-time highs. The hawkish stance across many major central banks is reflected in the number of rate hikes taking place. Expect further headwinds until perhaps major avgs correct to or beyond -20% before Powell cries “uncle”.