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As earnings season reports and US yields rise, US indices drop

The indices are in a correction and due to the size of the decline from all-time highs, I am starting to look for places where the likes of the Nasdaq bounce back from. 14,800 is my red line in which I remain bullish whilst the price closes above. However, I am not about to try and catch a falling knife.


Weekly Indices Analysis

The US 10-year yields Inflation Adjusted (TIPS) are steepening at a rate that some market analysts are saying is a signal for a deeper correction in the US indices. They often cite the US Treasury yields, the Fed’s Balance sheet, and the US debt as reasons why the monetary policy needs to be drastically changed, and if this should happen the market shock would be a 20%-50% correction. JPMorgan’s CEO Jamie Dimon came out and said that the Fed would need to do more than 4 rate hikes this year, calling for as many as 7 over the next 11 months. Even Fed FOMC members that were Dovish are calling for an expedited rate hike cycle.


Inflation is running hot and it’s not just in the USA that CPI readings are at multi-decade levels. The UK is now seeing CPI readings last witnessed 30 years ago.

From the end of the 2009 financial crisis to the end of 2021 the Nasdaq had traveled from around 1000 to 17,000. It's easily the greatest bull run ever but not without some hiccups along the way. In 2018 there was a Taper Tantrum as the Fed in their wisdom reduced the QE purchases and ran off the assets from their balance sheet. Much like they are doing now. Seeing yields rising at the pace we do now, some may say that there is a Taper Tantrum happening this time around too. If we were to get a 25% drop in the US equities, the Nasdaq would fall back to 12,500. If it were to turn into a recession and a 50% drop, the Nasdaq would be back to 8,300. The impulsive move from the March 2020 lows to recent all-time highs was a 139% return on those investors who saw through the pandemic fear and bought the Central Bank and Government stimulus narrative. It was a good 609-day run.

Personally, I don’t think we are going that far back down in price, but I do agree that we’re in a corrective period and most probably this will remain through the earnings season. Overall, the fiscal flows are around $500bln a month so there is plenty of money being pushed into the wider US economy. COVID-19 is still causing problems but not as many as before. Energy prices are a real problem and when they get above $80 and move towards $100, this to me is unsustainable and we do see them trigger a market correction. So I am hoping that the EIA reports which show an increase in supply and a drop in demand through 2022 come to fruition.


With regards to where I see this current corrective phase for the Nasdaq terminating, I would like to see a meaningful bounce off the 15,000 level. The run-up from October 2021 to the end of November 2021 was a 5-wave impulsive wave and for a while, I thought the correction of that set of waves would be over time rather than price. Now it appears that we are doing a deeper correction in price, so a deep retracement level would be 0.786% on the Fibonacci levels and the round number is 15,000 for confluence.


In the S&P500 today the worse performing sectors are Consumer Discretionary, Energy, Financials, and Industrials. The best performing is Consumer Staples, Utilities, and Materials. Tesla, Apple Inc., and Amazon are down -2.92%, -1.27% and -1.09% respectively.

In the Nasdaq once again, the drop was initiated by the top leading companies which are, Apple, Microsoft, Amazon, Facebook, Tesla, and Google. These companies make up 45% of the index. After the initial balance had been completed this cohort dropped below the first-hour trading low and dragged the other 55% of the index with it.

The Initial Balance extension to the downside was completed when we got a measured move of the range. But due to the weakness across the indices, the Nasdaq continued to press lower expanding the range. On the ticker symbol NDX which follows the underlying Nasdaq 100 shares but has a modified market-cap weighting, there is a gap of around 14,800 and this is the only recent gap that hasn’t been filled. This would be my line in the sand for the bulls.

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