that
stock market
is finally falling, and investors should have expected it to happen after five months of gains. Now it’s time to weather the storm.
It’s certainly been a whirlwind week for the stock market.of
S&P500
It fell 0.7% on Tuesday, its biggest decline in almost a month. And this time, it feels like there’s almost no place left to hide. Among the S&P 500 stocks, three stocks fell for every one that rose, with only two sectors ending the day higher: energy and utilities. No rotation here.of
CBOE Volatility Index,
The VIX rose 7% to 14.61, its highest since March 11th.
The reason for the decline in stocks is the rise in bond yields. The 10-year Treasury yield rose to 4.39% on Tuesday before returning to 4.373%, still at its highest level this year. Additionally, bond market volatility, which had been quiet for some time, suddenly returned. The Merrill Lynch Option Volatility Estimate (MOVE index), the bond market’s version of the VIX index, rose 9% on Monday, its biggest gain since January 2nd.
The stock market doesn’t want interest rates to fluctuate. Historically, stock market and bond market volatility have been closely correlated, according to 22V Research. Considering the current movement index, the VIX could easily go higher. That’s especially true.
SPDR S&P 500 ETF
According to Citorini Research, the company has generated incredible returns with little volatility, and has an “incredibly favorable Sharpe ratio of 4 or higher for the past six months.” “I’m not bearish, but I think it’s relatively unsustainable, and I wouldn’t be surprised to see a natural pullback to the recent SPX highs,” writes James Van Geelen at Citrini Research’s Substack. I am.
Now, the question is whether a correction, defined as a decline of 10% or more, has begun. It wouldn’t be surprising if that were the case. After all, corrections have occurred in most years since 1980, according to Dow Jones market data. Moreover, the S&P 500 index is up about 26% since its low in late October, and some technologists have warned in recent weeks that the market is rising too fast. The index also trades at 21 times trailing 12-month earnings (high relative to earnings), so any disappointment when earnings season begins next week could cause stocks to fall.
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Another risk is that the Fed may not cut rates as often as markets currently expect, which could keep rates high and ultimately slow economic growth.
Technically, it’s not safe. The S&P 500 index has fallen to around its 20-day moving average of 5,178, indicating it is losing momentum and could fall further. “Be wary if the stock price breaks the 20-day moving average,” Craig Johnson, chief market technologist at Piper Sandler, wrote. “The weight of the technical evidence indicates that the S&P 500 is susceptible to a 5-10% decline/correction in the coming weeks or months.”
So what should investors do now? Nothing. It may not be a good idea to buy more just yet, but it is a good idea to continue holding onto the index. The economy is still growing and businesses can still grow their profits. It’s almost certain that the Fed won’t raise rates. The stock market may need to fall in the short term before resuming its long-term rise.
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“We view this decline and consolidation as a healthy sign within the context of the current medium-term upward channel,” Johnson wrote.
The market is not about buying or selling. It’s a hold…until it becomes a buy again.
Email Jacob Sonenshine at jacob.sonenshine@barrons.com.
