S&P 500 falls to two-year low, bear market rally snuffed out

Wow, all three indexes up all morning, the Dow up some 200 points. Then at about 11 a.m., everything started going south again. Well, the report below does not comment on everything going up, just on the going down, but a case can be made that it was bargain hunting time this morning and that the selloff was over.  Also no explanation for the afternoon sell off except for same old, same old – inflation, Fed – you name it, they named it, though of course the brunt of the blame is placed on Powell’s speech last week and the Fed commitment to taming inflation pointing to very likely (but not certain) future rate hikes and the market having plummeted 12% since then.  All the standard rules are being thrown out and today’s most pessimistic prediction is for the S&P at 3,000 before this thing bottoms out.  

But there’s also an optimist in the crowd who says Q3 earnings start next week so all this can get turned around if earnings are above forecast.  Now when in the past several years have quarterly earnings not been above forecast?  It’s almost like an organized scam. The Wall Street prognosticators see doom in their crystal balls and project poor earnings and prices go way down. Then when the earnings come in higher, prices go way up and investors take big profits.  Oh well, one very positive thing is in the report below:  the three signposts that we’ve reached bottom -  a big drop in prices, a big jump in volume, and a VIX over 40.  We’re still quite a way from a VIX over 40.  And this is the first time since I’ve been doing this blog that no index numbers (except the S&P) have been reported.  No volume either but, per the CBOE, 11.8 billion shares were traded. 

Tue  September 27, 2022  5:20 PM

S&P 500 falls to two-year low, bear market rally snuffed out

By Chuck Mikolajczak

DJ: 29,260.81  -329.60        NAS: 10,802.92  -65.00         S&P: 3,655.04  -38.19      9/26

DJ: 29,134.99  -125.82        NAS: 10,829.50  +26.58        S&P: 3,647.29  -7.75        9/27

Sept 27 (Reuters) - The S&P 500 (.SPX) fell to its lowest level in almost two years on Tuesday on worries about super aggressive Federal Reserve policy tightening, trading under its June trough and leaving investors appraising how much further stocks would have to fall before stabilizing.

Stocks have been under pressure since late August after comments and aggressive actions by the U.S. Federal Reserve signaled the central bank's top priority is to stamp out high inflation even at the risk of putting the economy into a recession.

The S&P 500 touched a session low of 3,623.29, its lowest point on an intraday basis since Nov. 30, 2020. A late rally helped push the index off its worst level of the day, but the index still closed lower for a sixth straight session as it lost 7.75 points, or 0.21%, to 3,647.29 .  After the benchmark index fell more than 20% from its early January high to a low on June 16, which confirmed that the retreat was indeed a bear market, the S&P then rallied into mid-August before running out of gas.  That bear-market rally is now over.

"As long as the Fed continues to raise rates, and investors don't anticipate an end of the rate hikes, I think this market is going to continue to be weak," said Tim Ghriskey, Senior Portfolio Strategist, Ingalls & Snyder, New York.

The big blow for the index that re-ignited selling pressure was Fed Chair Jerome Powell's speech at Jackson Hole that confirmed the Fed's resolve to fight inflation, followed by a third straight 75 basis point interest rate hike by the central bank last week. The index has tumbled more than 12% since Powell's speech and has shown little signs of stabilizing.

Many analysts had looked at 3,900 as a strong technical support level for the index. That gave way 11 days ago under four straight days of selling.  "When you have these cascades of selling like we’ve seen since the Fed, really, support doesn’t really matter, you can slice right through it," said Ryan Detrick, chief market strategist at Carson Group in Omaha, Nebraska.  "Fundamentals and logic are almost thrown out the window because we are all wondering just how hawkish is the Fed, and then you look around this week and all these central banks around the globe hiked rates." Detrick said that coordinated hikes by multiple central banks left investors wondering how hawkish they all will end up being.  Robert Pavlik, Senior Portfolio Manager at Dakota Wealth in Fairfield, Connecticut said he is looking at a worst case of 3,000 for the S&P as a support level.

"People are concerned about the Federal Reserve, the direction of interest rates, the health of the economy, and also the next couple of weeks with earnings season coming up and companies reporting lower-than-expected earnings."  Analysts are still looking for signposts of investor capitulation that can show selling pressure is exhausted. But sell-offs this year have not contained all those ingredients -- a sharp drop in prices, a day of unusually high volume and a jump in the CBOE Volatility index (.VIX) to 40 or above. So, many investors to conclude that selling has yet to be depleted. 

"It goes down, you get some decent volume but you don’t necessarily have the classic signs of capitulation," said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin.  "Maybe enough has changed over the years that some of those indicators aren’t going to be a very good guide for the future."

That leaves investors looking for the next catalyst to help markets stabilize, or get cheap enough for to start buying again, such as signs the Fed's actions may be starting to tame inflation, a weakening of the labor market, and what the upcoming corporate earnings season may bring about.

"On (October 7), you get the employment situation report and the following week you get the inflation report so we will be on pins and needles waiting to see what those numbers say, and then you have earnings," said Jacobsen.