Bearish scenario: Shorts below 18100 with TP1: 17900... Anticipated bullish scenario: Intraday Longs above 18130 with TP...
Indices and Stocks in the Red
2022-11-22 • Updated
The stock market has reversed, and now it’s going lower and lower. What to expect? Let’s try to look through this situation for stocks and indices trading.
The current situation
Nasdaq (US100) and S&P 500 (US500), the major US stock indices, have lost roughly 12% to 25% this year. After two years of gains, it’s a painful drop. Now that the S&P 500 tested levels below 4050, the downside risk is 3800, or even 3600. A drop to 3800 would mean a loss of 21.18% since the beginning of the year.
The decline of the S&P 500 is mainly due to interest rates hikes. The rates are now at higher levels than the bank expected just a couple of months ago. Investors expect the Fed to raise the interest rate by another 100 basis points this summer.
Economic growth slowed, contracting 1.4% in the first quarter, and stocks have been hurt as tech and growth stocks continue to reprice in a new, more hawkish Fed policy.
The recession
According to a JPMorgan strategist, stock markets in the US and Europe estimate a 70% chance that the economy will slide into recession in the near future.
Recession warnings have sounded for months this year amid the war in Ukraine, coronavirus lockdowns in China, and a more hawkish Fed policy. Worries that policymakers' efforts to curb inflation will send the economy into recession have led investors to take nearly $10 trillion out of US stock markets this year.
While signs of a weakening economy are everywhere, it remains difficult to detect that a definite recession is approaching. Manufacturing and service activities haven’t reached their peak but are still expanding, consumers continue to spend, and employment and housing data are at the normal level.
If recession fears don’t materialize, restrained stock positioning and the reversal of the pessimistic sentiment will help the stock market recover.
What to expect?
According to analysts, similarly high chances of a recession have historically indicated further capital losses when a recession materializes. However, stocks tend to rise when the worst doesn't happen: the S&P 500 jumped 12% over the next 12 months. Analysts estimate that the market will be poised for an economic downturn and earnings recession if the S&P 500 falls below 3800.
Now analysts see valuations drop even further before the unpleasant decrease in the stock market ends, and earnings results will likely disappoint through 2022.
Similar
Bullish Scenario: Buys above 17910 with TP:18098.07, TP2:18277, and TP3: 18415 Bearish Scenario: Sells below 17850 with TP1:17730, TP2: 17700
During his program on CNBC on February 28, Jim Cramer expressed frustration with the impact of earnings reports on market behavior, noting how they often prompt rash decisions by average investors. He criticized the short-term focus and lack of attention to nuance in news coverage of earnings. Cramer cited examples of Home Depot and Lowe's, highlighting how investors reacted hastily to headline news without considering the broader context provided in earnings calls.
Latest news
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Bearish scenario: Sales below 80.00 with TP1: 79.60... Anticipated bullish scenario: Intraday purchases above 80.70 with TP: 81.50...