When do we get the bear market rally?
- SPY falls over 3% on Monday as panic selling again dominates.
- S&P 500 now having its second-worst start to the year in history.
- The S&P 500 main ETF is down 16% year to date for 2022.
Another hard stay for equity investors as all major indices suffered heavy losses. All sectors closed lower and over 90% of all listed stocks finished in the red. 90% down days are capitulation days and can lead to more capitulation selling. This is exactly what happened on Monday with last Thursday being another 90% down day. Panic is clearly the dominant theme in equity markets.
Goldman Sachs has also recently produced some research showing deteriorating liquidity, adding to problems. With such limited volumes, moves tend to be exacerbated which also leads to more panic and momentum.
S&P 500 (SPY) news: Energy stocks join the bear party
All sectors as mentioned, closed lower. Energy (XLE) is the year’s best performer but was the worst-performing sector on Monday. XLE lost over 8% on the back of falling oil prices. Oil was hit on fears for Chinese demand as continued lockdown and recent poor economic data from China have sparked fears of demand destruction for oil.
Growth stocks continue to move back to pre-pandemic levels. The sell-off that began with Netflix (NFLX) and Peloton (PTON) has spread with Upstart (UPST) being the latest growth stock to collapse. UPST reported earnings after the close and is down 40% in the premarket.
Chinese concerns are also hitting mega tech names. Reuters reports that Tesla (TSLA) has had to shut its Shanghai Giga factory again after only just getting it back up and running. The report outlines supply problems. Apple (AAPL) is also hugely exposed to China in terms of supply and demand.
The Fed’s latest report on financial stability has not helped: “the risk of a sudden significant deterioration appears higher than normal (…) A sharp rise in interest rates could lead to higher volatility, stresses to market liquidity, and a large correction in prices of risky assets.” This is already evident.
S&P 500 (SPY) forecast: A rally is nearing
When do we bounce? That seems to be the question we are hearing most this morning. In our piece on Monday, we reiterated our wait for a sub $400 call and now here we are. We also outlined the volume gap below $400 and the SPY did break and bottom out at $396. The risk-reward is now skewed to a bear market bounce but not just yet.
Wednesday has important CPI data and sentiment is still at peak fear. There may be a bit more selling pressure to come just yet, but the rally is imminent and should bring us back to $440. Investors will remain risk-averse until after the CPI release. We are on the watch for a rally with the RSI diverging from price (i.e. not matching the new lows).
A rally is coming but we do not mind getting in late, it should be a decent one, 10% or more so plenty of room for us all!
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