Is the uptrend over in US equities? S&P 500, Nasdaq, Russell 2000 update
12:11, 22 February 2023
The uncertain macro outlook which has been caused by improving economic data in the US and a Federal Reserve likely to remain on the hawkish path has halted the bullish momentum equities were enjoying up until a few weeks ago. Add to the mix bleak earnings and unsettling forecasts from some of the biggest retailers and you’ve got the perfect recipe for a sustained pullback in stocks, which culminated in a 2% and 1.6% drop in the Nasdaq and the S&P 500 on Tuesday after a long weekend in the US.
Walmart Inc. and Home Depot Inc., two of the most powerful retailers in the US, expect to see weaker profits in the current fiscal year as consumers feel the pinch of higher costs of living. In all honesty, is this really surprising? Not at all, we’ve known soaring inflation would catch up to company earnings at some point, but I think the fact that we are getting these warnings at the time when markets are starting to realise that the slowdown in CPI is likely to be more stubborn than they thought when disinflation started a few months ago has caused them to panic slightly. Of course, the weakness in equities had already started as a resilient jobs market and strong retail sales in January open the path for the Fed to keep rates higher for longer, something they have preached since the beginning but markets failed to believe, may I add.
Let's not also forget to mention the increasingly volatile geopolitical landscape as president Biden made a surprise visit to Ukraine all whilst China seems to be getting closer to Russia. Whilst the direct impact on stock prices is hard to value, we know that rising geopolitical tensions are usually bad for the overall stock market as it leads to an increase in risk aversion and demand for safe havens like the US dollar or gold.
Later this afternoon we’ll see the release of the Fed meeting minutes and whilst the minutes won’t capture the better-than-expected release since the meeting on February 1st it will give an insight into the thought process of the reduced 25bps hike and how FOMC members expect the interest rate curve to shape out in the coming months.
The S&P 500 is closing in on its 50-day SMA (3980) but it still remains above its 200-day SMA (3940) and its 2022 descending trend line, two key areas to watch out for. The path of least resistance in the short term is now to the downside but the pullbacks are likely to be limited as long as the index remains above those two key areas of support. The Nasdaq is facing a similar situation, with Tuesday’s pullback pushing the RSI into bearish territory but still above the 200-day SMA (11900) and its descending trend line which is helping to limit the bearish pullback.
Small-cap stocks have taken a greater hit with the Russell 2000 dropping 3% on Tuesday. These stocks are more sensitive to domestic factors and the prospects of a more hawkish Fed have been weighing on their valuations. The Russell 2000 tends to underperform in times of high interest rates so the drop in the unemployment rate to a 53-year low and the stubborn CPI have caused investors to consider adjusting their asset allocations to avoid being dragged down if rates remain above 5% for the longer term.
The index has now dropped below support around 1902 which was the neckline for the double top pattern that’s unfolding. Because of this, the pullback likely has further room to go making its way down slowly towards the next key level of support between 1820 and 1800. If we see a reversal in momentum and buyers take hold once again, 1905 is likely going to be a challenge in there short term.