Quick Note: There will be a change in the publication of the daily and weekend pieces, I'll have more details soon!
We got another day where the stock market declined more than 1% yesterday...as investors continue to worry about the impact inflation and the rise in interest rates will have on the economy and earnings growth. The decline came on an increase in volume, but at 4.2bn on the composite volume, it was not a big jump. Also, the breadth was not as bad as it has been on other recent “down days.” It was 2.4 to 1 negative for the S&P 500 Index and 4.6 to 1 negative for the NDX Nasdaq 100 Index. In other words, it was not a good day for the stock market, but the internals were not horrible.
That said, the decline did take the key charts we highlighted yesterday below their early September lows. The SPX, NDX, SMH, and AAPL all closed below their closing lows from September 6th (that we highlighted yesterday morning). The “lower-low” in the S&P was only a slight one…but it was a bit more meaningful in the NDX, SMH and AAPL. Having said this, those “lower-lows” were not quite as significant on an intraday basis, so if the stock market can bounce-back in a substantial manner today, it would give the stock market some badly needed relief……..However, if the stock market doesn’t bounce today…and instead, continues to decline…it is indeed going to confirm that the second leg of the 2022 bear market is underway. That, in turn, should mean that we’ll see a retest of the June lows (or worse) before very long. (The updated charts are below.)
On a fundamental basis, it’s going to be a tough for the market bounce today. FDX reported earnings last night…and they were much worse than expected. The stock is trading lower by a whopping 20% on this news…which is a HUGE decline for a mature company. In the announcement, FDX’s CEO said that business has turned down dramatically in the last month…and that the economy is heading for a worldwide recession. Given that FDX is a very good indicator for the U.S. and global economy, these results…and the comments that went along with it…raises serious questions about the consensus earnings growth estimates that exist for the rest of this year and for 2023! Needless to say, since the P/E ratio is still on the high side of history…and the “E” part of that P/E ratio looks more and more like it’s going to have to come down in a more material way…it makes it all but impossible for the market to avoid more eventual downside movement in the days and weeks ahead.
That does not mean that the market will definitely decline today. Even though this news out of FDX is quite negative, today is also a “quadruple witch expiration” day. This can cause the market to do some funny things…that have absolutely nothing to do with the underlying fundamental picture in the marketplace. Thus, it could cause the market to bounce nicely today…but on the flip side, it also means that any further decline might be exacerbated by the expiration……This is a long-winded way of saying that it’s hard to know what’s going to happen TODAY, but that we do expect more downside follow-through before long.
(BTW, today’s expiration day basically guarantees that we’ll see a HUGE jump in volume…whether the market goes down or up. Therefore, volume will not be a compelling indicator today. In fact, none of the “internals” are usually very compelling on a “quadruple witch” expiration day, so we won’t read too much into them when we look at the situation in the marketplace over the weekend.)
Needless to say, the recent developments in the stock market…and the news we’re getting out of companies like FDX…is leading more people to criticize the Fed for their tightening policy. The problem is that the real mistake is not what the Fed is doing right now…it’s what they did last year. Once the Fed made the mistake of keeping their massive QE program in place for too long, the inevitable reversal of that policy was always going to cause a big drop in the market and thus a significant slowdown in growth. This became even more evident when Russia invaded Ukraine…and the inflation problem became a much, much bigger one.
We can complain all we want about the Fed…and they DO deserve a lot of blame. However, the blame should be focused on what they did in 2021, not so much on what they’re doing now. They could not have kept the liquidity spigots wide open (or it would have created the kind of monster bubble that would have been impossible to recover from once it inevitably burst. Once inflation became a bigger problem (after the invasion of Ukraine), they this new tightening policy HAD to become a more aggressive one. Put another way, once Russia invaded Ukraine a bear market and a recession became all but inevitable. All this talk about a soft landing became wishful thinking at that point..…..In other words, a lot more Wall Street pundits should have seen this coming. We did.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.