Major U.S. equity averages closed lower for a fourth consecutive week while providing little to no shelter at the sector level. Maybe the massive declines in equity markets on Thursday were a response to the midterm elections.
But the WHY behind the move is not what pays you. We don’t do narratives. We have also been highlighting weak breadth for some time, so when the generals were finally hit, there was nothing left to hold up the market.
S&P 500 and NASDAQ 100
Both were lower on the week. Both closed near their weekly lows despite a relief rally on Friday. The damage has been, and remains, more pronounced in the NASDAQ 100, which sliced below its 60-week moving average.
As we said on the show last week, the S&P 500 was likely to pay a visit to its 60-week moving average. That played out.
Source: Optuma
Breadth
Breadth has been, and remains, weak. This is the whole story for the equity market.
The NYSE Advance/Decline Line continues to trade near one-year lows. New 52-week lows on the NYSE also remain elevated, with the five-day moving average stubbornly holding above 100.
Source: Optuma
Intermarket Analysis One
It does not matter whether you are a traditionalist who uses the Dow Jones Transportation Average or a bit more modern and prefer the PHLX Semiconductor Index. Both are sending the same message about the equity market.
Both have broken down from record highs and now trade below key moving averages. The damage only worsened last week.
Source: Optuma
Intermarket Analysis Two
Bonds were the only real haven in asset markets last week, pushing investment-grade corporate bonds closer to their declining moving average.
At the same time, commodities came under pressure within a broader uptrend that remains very much intact.
Commodities tend to move inversely to equity prices, making this a key trend to keep on the radar.
Source: Optuma
What Will the Fed Do?
After Thursday’s massive sell-off in equities, investors were greeted with some good news on the economic front Friday as the employment report came in stronger than expected. From an economic and social perspective, that is generally welcome news.
Counterintuitively, however, it may not be the best news for asset markets. A stronger labor market gives the Federal Reserve room to continue hiking rates.
Despite some narrowing of the gap, the two-year yield remains 58 basis points above the Effective Federal Funds Rate.
Translation: the bond market still wants at least two more hikes from the Fed.
Source: Optuma
Final Thoughts
Breadth had been deteriorating for months. Then the generals started taking heavy fire. All the market needed was a catalyst, a spark capable of turning underlying weakness into outright selling.
Maybe the midterm elections were that spark. Maybe they weren’t. The “why” does not matter. What matters is that the conditions for weakness were already in place before Thursday’s sell-off.
