The market started the new month with a volatile week that produced nett losses for the major indexes even after the Fed delivered a widely expected 50 basis point rake hike as it battles to curb soaring inflation. The Nasdaq led the way, falling -1.28% while the S&P 500 surrendered -0.21%. Small caps also struggled, sending the Russell 2000 lower by -1.30%.
This will be a big week for inflation watchers, as volatility could remain in store if Wednesday’s inflation data comes in hotter than expected. Energy prices will also remain in focus amid a looming EU embargo on Russian oil.
Here’s what you need to know to start your week.
1. Elevated volatility
The Nasdaq and S&P 500 posted their fifth straight week of declines last week, and the Dow Jones Industrial Average its sixth. It was the longest losing streak for the S&P 500 since mid-2011 and for the Nasdaq since late 2012.
Quarterly earnings continued pouring in during the past week, but even positive results were often met with selling amid concerns about headwinds from soaring inflation.
Market volatility looks set to continue as the combination of a more hawkish Fed, a surge in bond yields, and geopolitical risks such as the war in Ukraine weigh on investor sentiment.
2. Energy prices
The European Union is close to agreeing on a fresh round of sanctions against Moscow for invading Ukraine, including a phased embargo on Russian oil, which makes up over a quarter of EU imports.
The move will push European refineries into a race to find new crude suppliers and leave drivers with bigger bills at the pump at a time when the cost of living crisis is squeezing consumers globally.
The looming ban saw U.S. crude prices rise about 5% for the week last week, while Brent rose almost 4% as the prospect of tighter supply offset concerns over the outlook for the global economy.
Key Economic Calendar (Weekly)
Wednesday’s CPI data for April will show whether the fastest surge in inflation in over 40 years has peaked. The annual rate of inflation came in at 8.5% in March as gasoline costs hit record highs.
Economists are forecasting an annual rate of 8.1%, but a stronger than expected reading could potentially underline the case for even more aggressive monetary policy tightening from the Fed.
Investors are fearful that aggressive tightening by the Fed could tip the economy into a recession.
All times listed are EDT
Wednesday
8:30: US – Core CPI: forecast to rise to 0.4% from 0.3% MoM.
Thursday.
8:30: US – PPI: to fall to 0.5% from 1.4%.
Top 3 Leading and Lagging Sectors (Weekly)
10 of the 11 S&P 500 sectors closed lower with the worst performers being the consumer cyclical (-3.89%), real estate (-3.68%), and consumer defensive (-2.08%) sectors.
Energy sector remains in mid-term strength (+7.41%) as is the sole sector that ended last week in positive territory with outperformance.
Market Breath (Weekly)
% of Stocks Above 50 DMA = 22.81% (-4.64%)
% of Stocks Above 200 DMA = 25.77% (-6.80%)
Market Technicals – (S&P 500, NASDAQ, Bitcoin, Bonds & Credit Spread, NAAIM)
$SPX (S&P 500) vs $RSP (S&P 500 Equal Weight) – (Net High/Low -699)
Stocks ripped higher following the Fed meeting on May 4, but that didn’t last long. The move higher seems to have been premature, reversing gains on May 5. Investors seemed to have refocused their attention on the critical pieces of the meeting: the Fed would be raising rates and, more importantly, as a result tightening financial conditions.
The S&P 500 ($SPX) fell -0.21% last week, establishing its 5th consecutive losing week. $SPX remains trading below all of its major moving averages, with prolonged declination to its 10 and 20-day moving averages.
The immediate support to watch for this week is at 4,060 level, the lowest level traded for the whole of 2022.
$QQQ (Nasdaq 100) vs $QQQE (Nasdaq 100 Equal Weight) – Trading Towards 2 Year Low
Tech and growth names have been hard hit since the start of 2022 by a rapid rise in Treasury yields on the back of expectations that the Fed will hike interest rates aggressively to combat high inflation as higher rates can hurt their companies with high valuations based on the prospect of future profits.
$QQQ fell -1.28% over the week, breaching the lowest level it traded year to date at $317.
The support level to watch for $QQQ this week is at $295.50, a 2 year low level that was last traded in March 2021.
$BTCUSD (Bitcoin / USD) – Bearish Head and Shoulder Pattern In Play
Bitcoin ($BTCUSD) fell -11.60% last week, affirming a breakdown of the Bearish Head and Shoulder Pattern that has been highlighted over last month.
The next level of support to watch for $BTCUSD is at $29,600, a major support level that $BTCUSD have rebounded on 4 occasion in 2021.
$PCCE (Put/Call Ratio Equity) & $VIX (Volatility S&P 500) – $PCCE And $VIX Remains At Elevated Level For Caution
The spike level to watch for $PCCE in the last 24 months period is at 1.00. This level has been flirted over with on various several days during the last two weeks of April. The current reading of 0.968 (-12.83%) reflects a prolonged risk-off sentiment of the markets. The critical level to watch for $PCCE is at 1.20 for further accelerated sell off in the equities market.
The CBOE Volatility index ($VIX), also known as Wall Street’s fear gauge, jumped to 33.73 (+11.79%) last week, nearing its highest level of 2022 at 36.44 set in March.
$IEI/$HYG (Credit Spread) – $TNX (10YR Treasury Yield) – Yield Nearing 4 Years High
Market participants are keeping a close watch on credit spreads as one of the better economic signals. Junk bond issuers are perceived to be bigger credit risks, so if economic growth slows or contracts, there will be increased angst that these issuers won’t be able to make good on their interest payments. Hence, a widening high-yield spread is regarded as a leading indicator of difficult economic times which, in turn, often invites a more challenging period for the stock market since difficult economic times translate into weaker earnings prospects.
Credit Spread remains muted with a minimal increase to 1.53% over the week (+0.01). The Treasury market has been for sale this year, and the selling has been aggressive with $TNX pushed further up to 3.154% (+0.032) nearing its 4 years high of 3.252%. It has more than doubled since the end of last year.
Meanwhile, the yield on the 2-yr note, which is most sensitive to changes in the fed funds rate, has surged nearly 200 basis points to 2.67%.
The Treasury market needs to settle down for the stock market to settle down. Right now, both are a volatile mess.
NAAIM Exposure Index 57.18 (+10.93)
The NAAIM Exposure Index represents the average exposure to US Equity markets reported by members of the National Association of Active Investment Managers. It provides insight into the actual adjustments active risk managers have made to client accounts over the past two weeks. The blue line depicts a two-week moving average of the NAAIM managers’ responses.
This week’s NAAIM Exposure Index number is: 57.18, picking up from the previous week low of 46.25.
Top Trading Ideas for the Week
$FNKO – gapped out of its box range setup upon latest ER surprising on both top and bottom line. substantial vol observed post ER, trading above all of its major MAs. one of the few names that were trading flat since Feb 22.
take note this name is pretty illiquid. 660k avg vol pic.twitter.com/QRHGDr3rvG
— Jeff Sun, CFTe (@jeffsuntrading) May 9, 2022
