Market update May 14, 2022

We're sitting at an important potential inflection point in the markets and for those who haven't been keeping a close watch here's a quick recap. 

Sections of the stock market began peaking in November 2021 along with crypto currencies.  Spectacular losses have occurred in once high-flying names along the way. Examples: Bitcoin peaked Nov 10 and is currently 57% percent off the highs. Netflix peaked Nov 17 and is currently 73% off its peak. Shopify peaked Nov 19 and sits 77% off its peak.

The broader market has faired better, with the S&P 500 bouncing Thursday when it hit 20% off its peak, which occurred January 3. This is important because 20% historically has been used to define bear markets and because recent "major" bear market have had a significant bounce after being down 20%, at which point they re-tested the 200 day moving average. Exceptions were the covid crash of 2022 and the 1987 crash, but both of those were "black swan" cases that did not accompany protracted economic contraction. 

Conventional wisdom would suggest that (1) stocks down 70-80% in just a few months have to rally from here and (2) the S&P's recent bounce off the 20% mark should hold until the market rallies back to test the 200 day moving average. However, there are reasons for concern- both technical and macroeconomic- and a failure to hold to above the 20% mark could result in rapid selling. 

The bear thesis: markets have been artificially inflated by years of extraordinary Fed interventions and now out of control inflation prevents the Fed from becoming a backstop to the markets. In other words, with no "Fed Put," true price discovery can occur for the first time in years. What do the charts show?

Apple is one of the last big tech stocks to break down, and that began happening in the last few sessions. On Friday it was holding trend by a thread. Can it continue to bounce and make this into a false breakdown? Next few sessions would be key.

Bitcoin is breaking down below key support and the market has been moving in correlation with it for months. It tried to bounce back on Thursday. Like Apple, can it hold this level and make Thursday into a false breakdown? There has also been strange activity in the "stable coin" space recently and all of these things could very well be harbingers of something more ominous.

The Dow broke below key horizontal support this week but re-tested that level on Friday. Can it continue the bounce and recover support or will it take out last week's lows? There is still some decent support with the falling trendline several percent below but if that gets taken out the selling would likely accelerate.

It could be shocking to think that the Nasdaq has dropped this far already but hasn't had a true volatility breakout yet. Above is the trendline of Nasdaq volatility from the 2000 dotcom peak. You can see that it's really been trying to leak out the last 2 weeks but it tucked back in at the close on Friday. Does this mean it's another failed breakout, or will is the third time the charm? A true breakout here would be really bad not just for the Nasdaq but the markets in general as it would no doubt bring other sectors of the market down with it. It would also likely suggest that we're entering into not just a bear market but a major bear market. 

I've been studying markets long enough to know that it's hard to predict exactly what will happen, but I've also seen that there are sign posts to help us interpret where we're at. There's a shocking amount of order within the chaos. The next few weeks, maybe even the next few sessions, could bring us a lot more clarity about the nature of the beast we're dealing with.