Markets are set to form a temporary bottom in the coming days and deliver a 2-3 week bounce. Sentiment, shown above, is at an extreme. Every time we witness a 5%-7% consolidation, we see panicked financial media headlines with extreme downside crash targets touted endlessly. Buying at market bottoms is never easy as most retail investors panic sell as larger bank trading desks buy. The NDX has experienced the greatest decline over the past two weeks as a result of rising interest rates. But there is far too much capital circulating around the globe that needs investment to expect a bear market or major crash. The financial system remains intact with no systemic banking risk currently visible. This consolidation is a product of deleveraging by institutional capital. We expect capital to rotate into different sectors over the next six months which will be covered in our Nightly Briefings.
The past week’s economic data was mixed overall. Weekly jobless claims spiked to 286,000, which could lead to disappointing payrolls data. The Philly Fed Index, Building Permits, and Housing Starts beat expectations, but the Manufacturing Index and Existing Home Sales readings missed by alarming margins.
Technically, the S&P 500, the Dow, and the Nasdaq are now beneath their 50 and 200-daily moving averages. Small-caps remained under extreme pressure, with the Russell 2000 hitting its lowest level in 10 months. The VIX spiked back above $25 near the end of the week, but we see signs of divergence with it remaining shy of its December high.
Economic data this week:
The Markit Manufacturing and Services PMI’s: Monday
Consumer Confidence: Tuesday
Fed’s Monetary Statement: Wednesday
Fourth Quarter GDP: Thursday