Back to all-time highs or a bear market rally? – Episode 138 of Damien’s Midweek Markets

The 138th episode of my weekly YouTube show where I discuss what is happening in investment markets and what to look out for. This week I talk about whether we are likely to see all-time highs or a bear market rally.

Each show lasts between 5-10 minutes and is aimed at DIY investors (including novices) seeking contemporary analysis to help them understand how investment markets work.

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Abridged transcript - Midweek Markets episode 138

Last week I discussed the historic moves in investment markets in the first half of the week and it’s well worth going back to listen to that show to understand where the market has been.

If you had only looked at equity markets at the start and the end of last week you would have been forgiven for wondering what all the fuss was about. Believe it or not the S&P 500 finished the week in positive territory, despite the volatility and carnage we'd seen over the previous 5 trading days.

While the phrase, “all's well that ends well” springs to mind we are not quite out of the woods just yet. Monday brought to a close a dismal January for equity markets globally. The tech-heavy Nasdaq 100 finished January down an eye-watering 8.52%. The Japanese Nikkei 225 was down 6.22%, the S&P 500 was down 5.26%, MSCI Asia Ex-Japan fell 2.74%, the German DAX lost 2.6% and the MSCI Emerging Markets fell 1.83%. It meant that US stocks in particular endured their worst January since the financial crisis. The real outlier was the FTSE 100 which finished January up 1.08% boosted by its lack of tech exposure and high energy stock exposure.

But it was not all doom and gloom. After I made last week’s show, equity markets embarked on their strongest four-day rally since November 2020 when Biden won the US election and the covid vaccine was first announced. To give you some perspective, at the start of Wednesday (today) the S&P 500 was sitting just shy of 4600, which is quite the turnaround from the low of 4222 that we saw on Monday last week.

The factors behind the move higher include a number of US Federal Reserve members making statements over the weekend that were deemed more dovish than the one made by Chair Jerome Powell last Wednesday. The situation in Ukraine hasn’t so far escalated into an all-out conflict but perhaps the biggest driver behind the positive sentiment has been a number of strong earnings reports. This triggered a short squeeze (where those betting that the market would fall are forced to buy stocks to unravel their bets) which pushed equity markets higher.

But from a technical analysis point of view, the previous support lines I’ve mentioned, for example on the S&P 500 the 4500 level, the 200-day moving average and 4600 turn into lines of resistance. What that means is that the market has to gain enough momentum to break up through those barriers if it is to continue higher. So it was always unlikely that any rebound would be as aggressive as the sell-off that we saw just a week earlier. And as I make this show the S&P 500 has begun to falter at the 4600 level.

This week was always going to prove tricky for tech stocks with so many big US names announcing earnings. After last week’s show Apple announced strong earnings results as did Google ( the parent company is known as Alphabet). The latter saw its shares price jump 10% on Tuesday as a result of its strong earnings report. This added fuel to the rebound of the previous sessions and US stock markets began approaching levels where a potential break higher, towards those recent highs, was on the cards.

But after markets closed on Tuesday, Facebook spoiled the party by unveiling disappointing earnings results which included the fact that daily active users fell for the first time ever. The share price of Facebook (the parent company is now called Meta) is currently down 25% in trading today. Similarly, disappointing reporting from Paypal saw its share price fall 25% the previous day.

These disappointments have now heaped pressure back on technology stocks as investors grapple with tightening monetary policy in the US as well as historically high stock valuations. As I make this show the Nasdaq 100 is down by over 2% today while the S&P 500 is down over 1%, dragged lower by Facebook in particular. Don’t forget that Meta/Facebook has a 2% weighting in the S&P 500.

It means that once again investors are grappling with volatility and the possibility that we could see another leg lower in equity markets, unless dip buyers come out in force, as we saw at the start of the week. With Amazon due to announce its earnings figures after today’s close they will perhaps take on even more importance and influence which way markets may go in the short term

But adding to the negative mood today was the historic jump in euro area inflation versus markets expectations this week. Add in the fact that today President Lagarde seemed unwilling to double down on her previous view that the European Central Bank was very unlikely to hike rates in 2022, equity market mood was further soured globally. Of course the Bank of England did in fact hike interest rates once again today (pushing the base rate from 0.25% to 0.5%) but this was expected and priced in by the market. Bond yields continue to rise with the 10 year US treasury yield back at 1.84%.

Right now bond and equity investors are struggling to find a sense of direction and the coming days will likely be telling which way they go. And there is the potential for the move to be aggressive. But it isn’t unusual to revisit recent lows before the market reestablishes an uptrend. So keep an eye on the 4222 level on the S&P 500. Also keep an eye on the US dollar, which is now down almost 2% from its recent high. If it now establishes a new downtrend then that should be good news for risk assets generally.

The big question is whether the recent rebound will take us to new highs or whether it is a rebound in an unfolding bear market?