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There was no shortage of excitement last week, as we saw a mix of economic data, chatter from Fed members, and action in the markets. Let's dive in and take a look at some of the noteworthy developments.
Sentiment, positioning, and breadth
We saw the VIX drop to 26.7, but HY spreads rose meaningfully to 5.87%, the widest it has been since the summer of 2020. HY spreads widening are a component of tightening financial conditions, and this puts pressure on thousands of BBB and lower rated companies that are struggling with rising costs on debt issuance, refinancing, and revolving debt.
The NYMO (inverted) shows a relatively flat reading, which shows us that the buying which we saw on Friday may not be happening with too much conviction ahead of the holiday weekend. The CBOE equity put/call ratio is showing us a similar reading as NYMO. Somewhat neutral, as there is generally a larger amount of volume on equitiy calls than puts, but nothing that resembles any sort of extreme either way.
Meanwhile managed money bought the dip via the NAAIM reading. They have been caught on the wrong side of this market collectively for much of 2022. NAAIM has become a good contrarian indicator, but right now the reading isn't too bullish to tell us that it's worth fading. Finally, Rydex bear/bull ratio is climbing, but isn't noteworthy.
Econometrics
The week started off somewhat strong, with better than expected durable goods orders and much better than expected pending home sales, but from there things went downhill. We saw a much weaker than expected Richmond Manufacturing Index, a soft CB Consumer Confidence reading, Final GDP come in worse than forecast, and ISM coming in weak. The silver lining was a slightly better than expected Core PCE price index (something the Fed watches very closely as their favored inflation metric).
This all led to the Atlanta Fed's GDPNow reading being revised down to -2.1% for Q2 2022. This would put us into a technical recession as Q1 also showed a contraction of GDP by 1.6%, according to this week's data. This all puts the Fed's aggressive tightening cycle under close scrutiny as market participants begin to feel that the possibility of a 'softish landing' is likely next to impossible.
Financial conditions
We're seeing the tightest financial conditions since 2020 across several metrics, and they're tightening at a rapid pace. This prompts concerns about liquidity within the market, as well as the fungibility of rising revolving debt payments, as well as the cost associated with funding new debt and refinancing old debt.
Global equity markets
That pressure was also felt across global risk assets as many declined because of diminishing liquidity encouraging deleveraging and rising recession risks compelling a flight to ostensibly safer assets, such as bonds and defensive stocks.
US equity markets
Equity indices in the US fared poorly in the start of 2022, with the NASDAQ leading the way lower, yes even more than the Russell 2000 amazingly enough, with a loss of 28.87%! The S&P 500, meanwhile, lost 19.74%, which was the biggest loss for the index since 1970.
ETF performance
There was noteworthy weakness in technology, led by semiconductors. Cyclicals also saw distributive pressure. On the other side there was a reasonable bid in much of the energy sector and fixed income market.
Leading sectors
Transports, semis, home builders, and durables staged an impressive countertrend rally, but the former two began to give that same rally up as the week went on. Not an encouraging sign for these leading components of the economy and market.
Futures
Lumber led as natural gas bled, with canola catching a bid after a deep decline recently, and wheat and corn having their Russia-Ukraine war premium thoroughly discounted as concerns about crops appear to be fading among traders. Natural gas fell quickly on account of an unanticipated storage build, part of which was made possible by Freeport LNG's facility exploding and destroying a lot of methane demand as a result. But summer heat and fertilizer demand may bring back resurgent natural gas demand in the weeks and month's ahead.
Zooming out
On a weekly chart it's abundantly clear just how much technical damage has been inflicted, with the S&P 500 in a downtrend as measured by Ichimoku technical analysis, the weekly EMA(8), and slipping below major supply areas. By any reasonable measure the S&P 500 is in a rather prolific bear market that seems set to continue. As long as that's the case every rip seems to be worth fading as buyers become exhausted.
The NASDAQ has had its own not so excellent adventure as well, with only 12.83% of the Composite above their respective daily MA(200).
These readings are touching levels that haven't been seen since the COVID crash of late, showing the true extent of technical damage underneath the surface.
Looking forward
The market has yet to price a normal recessionary environment for the economy and earnings, which would likely be around 3200-3400 on the S&P 500 if it were to comport with historical norms.
Meanwhile, margin expectations are somehow near a record high despite an increasingly difficult business environment for most sectors.
In conclusion
The week that was continued a theme familiar to all in 2022, one of distributive deleveraging from increasingly tight financial conditions, but one where there was also no disorderly selling. Nothing that approaches real fear or panic. Instead, it would appear that at least for now, the process of exiting positions across various asset classes has been without sellers trampling over each other.
A good sign, to be sure, but it also means that we aren't really seeing anything that resembles capitulation. There's been no real exhaustive durable bottom from sellers of yet. So the path of least resistance is likely to remain lower unless and until that and the Fed's policy changes over the longer term. Short term the countertrend rally may indeed continue until about SPX 3900-4000.
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