Continued Selloff Strikes Fear In Stock Market

In this article:

• Fear drives prices down
• The market now in official bear territory
• Events this week could fuel the fire

Any previous calls for a stock market bottom have been proven premature.

Inflation is rising, consumer and investor fears are growing, and the Federal Reserve (Fed) is set to continue raising interest rates.

The market spiraled further down Monday and some analysts are predicting the market will fall another 10-20% before a “true” bottom can be determined.

Following are what Simpler Trading team members are seeing in this volatile market that has investors and traders scared of what may lie ahead.

CPI, Fed strike fear in stock market

This week opened as a continuation of last week when the market sold off into Friday.

The Consumer Price Index (CPI) put inflation at 40-year record levels and the Fed hinted at raising interest rates higher than previously – possibly .75% instead of the expected .50%.

Growth stocks, such as those in the financial and technology sectors, were hit hard, and the bleeding didn’t let up into Monday.

The Dow closed at 30,516.74 points to drop 2.79% (losing 876 points on the day). The Nasdaq ripped down to 10,809.23 points for a crushing 4.68% tumble while the S&P 500 was hit hard, losing 3.88% to 3,749.63 points.

And, the official word is the stock market is in bear market territory as the S&P 500 has closed down more than 21% from the previous high of 4,596.56 on Jan. 2.

Cryptocurrency, previously touted as the next greatest thing in investing and trading, hit new lows on Monday. Bitcoin closed at $23,440 and is down from a November, 2021, high of $65,967.

Why did the CPI report hit the market so hard?

The report on spiked short-term interest rates higher while longer term yields rose at a slower pace, causing the yield curve to flatten. This in turn reduces profit margins for banks who lend at a higher, long-term rate and borrow on condition of lower, short-term rate.

Technology stocks suffer in this interest rate collision because the threat of higher interest rates pushes these tickers down further than the broader market. Software and semiconductor stocks were hit hard, including industry-leading Microsoft (MSFT) and Nvidia (NVDA).

Both these stocks are now in confirmed downtrends.

Microsoft was also hit with more selling after company management reduced growth outlook and market pressures kicked in. Because momentum indicators are negative, technology stocks are falling from preferred watchlists among Simpler’s traders.

Some good stock news – mixed with bad news for consumers – were the outperforming energy stocks. Oil prices have increased, affecting consumers, and energy holdings held up better than most in the selloff.

Fear is running wild in this uncertain market environment.

The trend of the CBOE Volatility Index (VIX) is upward which is not good for stocks. The CBOE Volatility Index (VIX) – or “fear index” pushed higher Monday to above 34.

The Fed has its Federal Open Market Committee (FOMC) meeting this week to discuss next steps for monetary policy as the government tries to stem inflation. Traders are closely watching the percent increase in interest rates and any comments regarding policy going forward.

Simpler’s traders anticipate stock market volatility to remain high going into and after the meeting, especially with the broader markets in a downtrend.

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Four signals pit bulls vs. bears

The never-ending tug-of-war game between bulls and bears in the stock market is rough these days.

Whether bull or bear, traders need to know this game is serious and those with solid information and patience stand a better chance of winning over those who don’t have information and act on emotion or news headlines.

This market environment has four key signals to watch (reviewed earlier in Simpler Insights). The bears appear to keep winning by taking control of the signal calling:

• U.S. Dollar Index (DXY) – DXY is under 104. Formed in 1974, the index measures the value – rise and fall – of the dollar relative to a collection of foreign currencies related to U.S. trade partners. Traders watch whether the dollar gains strength against this “basket” of foreign currencies whereas the index rises and if the dollar weakens the index falls. Comparison currencies include the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
• Treasury notes – Bulls are out and bears are in here. The 10-year U.S. Treasury Notes (ZN) or “T-bond” is based on the U.S. government borrowing money by issuing bonds for the 10-year term and at fixed interest rates. This signal is wavering and the notes need to trade “flatish to up” for bulls.
• “Fear Indexes” – Fear is on the rise across the board. The Chicago Board Of Exchange (CBOE) Volatility Index (VIX) has been extremely high in recent weeks along with the VVIX. The VIX index anticipates market volatility over the next 30 days. The VIX has been high, peaking above 28 last week (it topped 34 today and above 20 is considered high volatility – more fear in the market). The VVIX – essentially the fear index of the fear index – measures volatility of price in the VIX.
• High-yield bond – Although a higher risk, this can be a leading indicator for stocks, but the downtrend is giving bears the edge. Checking the iShares IBoxx $ High Yield Corporate Bond ETF helps track investment results of an index composed of U.S. dollar-denominated, high-yield corporate bonds. Holdings include finance, healthcare, energy, and communications.

If bears hold these four signals, then they control the market.

Add in continued losses in all three major indexes and this is a bear market by any consideration.

Fear is of concern to all traders.

The VIX could be on a trajectory to spike as high as 40-50 within the next six months. Considering projections of a recession hitting after the first of the year, Simpler’s traders are cautious that the VIX could push 100 by October, 2023.

Fear is so strong that even outperformers such as energy appear more vulnerable than before. Internal signals hint that such weakness reveals how the market may continue to move as a unified “bloc” with little rotation and uncharacteristic good and bad days.

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Interest rate decisions driving markets

What is next for traders?

Stay informed. The market is twisting and shifting unexpectedly almost on a daily basis.

Traders need to keep watch over upcoming events and adjust trading plans based on market movement. This requires a regular review of what is happening.

Here are the “circle in red,” top events on the Simpler Trading calendar this week:

Updates for the calendar:

• Tuesday – U.S. Producer Price Index (PPI) program which measures the average change over time in the selling prices received by domestic producers for output. The prices included in the PPI are from the first commercial transaction for many products and some services.
• Wednesday – U.S. Retail Sales report; FOMC announcement/press release; Australian employment numbers.
• Thursday – Swiss National Bank (SNB) interest rate decision (expected to continue higher); Bank of England (GBP) interest rate decision (could be fifth consecutive hike); Bank of Japan (BOJ) interest rate decision (neutral or higher?).
• Friday -European Union Consumer Price Index (going higher?) and FOMC Chair Jerome Powell speaks (calming information or fueling the fear fire?).

Having patience while waiting for solutions

Consumers and traders holding out for a potential peak in inflation to lessen the Fed plans to stay aggressive in raising interest rates will likely be disappointed.

Inflation is higher than expected due to higher consumer costs, especially food and energy prices, along with commodity prices. Any near-term solution does not appear to be on the horizon.

Working through events on the docket above for this week should give traders plenty of information, and they will need to exercise patience with any decisions based on new data.