- Rising yields continue to drive prices of risk assets lower
- Charts tell you everything you need to know: this is a bear market
After a bright start to the week, the major US indices have started to head lower again as the earnings optimism was replaced by macro fears. Tracking European markets, US index futures were pointing to a lower open on Wall Street ahead of the last session of the week.
Investors have shied away from buying stocks this year, mainly because of fears over sharp policy tightening by the US Federal Reserve and other central banks around the world amid an environment of high inflation and low growth. Given that the Fed is yet to tilt to a more dovish, low-yielding assets like tech stocks listed on the Nasdaq and gold are likely to remain out of favor as bond yields continue to press higher.
I warned about a potential reversal last Friday. But if you don't follow the macroeconomics and fundamentals closely, just remember that the charts reflect everything known out there. The lower lows and lower highs tell you everything you need to know as a trader. Not only that, but the moving averages are also all pointing lower. Look at the Nasdaq chart below, with both the short-term 21-day exponential and long-term 200-day simple moving averages being above market with downward slopes.
Moving averages are perhaps the most objective way to tell the trend, as there is no subjectivity involved (which can be the case with drawing tools).
Previously, these averages were pointing higher, and investors used to buy the dips whenever there was one. However, the good old days of the bull market are over.
Right now, inflation is so bad around the world that people are struggling to meet ends meet. Companies are going to struggle to make the sort of sales and profits they enjoyed previously. Rising interest rates mean borrowing for expansion is also costing more. Collectively, investors know all this, which is why we are in a midst of a bear market.
So, my recommendation to traders is this: remain bearish until the charts tell you otherwise, even at these lower levels.
With the Nasdaq futures breaking back below the June low (11036), this has potentially paved the way for a fresh drop to a new yearly low in the days to come. Remember that other markets are doing a similar thing—see Chinese markets for example.
Whatever the outcome of earnings or macroeconomics, until the major indices start making higher highs and higher lows, I will continue to look for weakness and bull trap signs to emerge on short-term bounces. I just don't think that right now—with interest rates continuing to rise—is the environment for a stock market rally. Granted, we will get bounces here and there, but it will all be inside the larger bearish trend.
All that said, a move north of the most recent high at 11729 would tip the balance in bulls' favor in the short-term outlook. In the longer term, they will need to repair a lot of damage to regain control again. To be clear, my base case scenario is that we will see new lows first before any serious bullish attempts are made.
Disclaimer: The author currently does not own any of the instruments mentioned in this article.