Anika Begay
A week of wild trading on Wall Street ended with the S&P 500 more or less back to where it started, but the lessons whipsawed investors learned over those five days could determine what happens next. The S&P 500 had its worst day since 2022 on Monday, and then its best day since 2022 on Thursday. The 10-year Treasury yield dipped below 3.7% on Monday before closing around the 4% level. And Wall Street’s “fear gauge,” the Cboe Volatility Index, actually ended the week lower despite rising to 65 on Monday, its highest level since 2020. But with the S&P 500 ending the week down less than 0.1% in a quiet session on Friday, the market appears to have stabilized. “With inflation currently under control globally and evidence of a recession in short supply, recent volatility has produced some corrective weakness but does not have the hallmarks of a bear market,” Tim Hayes, chief global investment strategist at Ned Davis Research, said in a note Thursday. .SPX 5D mountain The S&P 500 ended the week nearly flat. Signs beneath the surface indicated that markets were actually holding up quite well. For example, Bespoke Investment Group reported Friday that more than two-thirds of stocks in the S&P 500 were still trading above their 200-day moving average, a sign of strength for chart watchers. And in the bond market, interest rate volatility did not appear to be fazed by investors in high-quality corporate debt. “Investment-grade spreads have held up,” Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, told Vscek. “You had the biggest daily spike ever in the VIX, and yet IG credit didn’t expand that significantly. And I think that’s because investors are really a little skeptical about some of this stock market volatility.” .VIX 5Y mountain Cboe Volatility index, 5 years Even in Japan, where there were huge moves in the local stock market and the yen late last week and early this week, there were signs of resilience. After suffering its worst day in decades on Monday, the Nikkei 225 index ended the week down less than 3%. “It was a 1987-style crash, but it was a 15 basis point move by the Bank of Japan that doesn’t seem to have changed the real fundamental outlook for these companies,” Jeremy Schwartz, chief global investment strategist at WisdomTree, told Vscek, referring to an interest rate hike last week by the Japanese central bank. One basis point is equal to one hundredth of a percentage point (0.01%). Reasons for Concern However, the recent market weakness culminating in Monday’s big drop suggests that some of the main drivers of this bull market are running out of steam. “It’s possible that the rally will continue for another week or so, but eventually stocks will fall to new lows. … The narratives around both AI-related tech stocks and the global economy will likely get worse rather than better,” Peter Berezin, chief global strategist at BCA Research, said in a note to clients. Others are warning that some of the issues that contributed to the initial decline, such as the unwinding of the yen carry trade, have yet to be resolved. Those factors will mix with a period of seasonal weakness for markets and the changing fortunes of the upcoming U.S. election in the coming weeks. “Getting out of these sell-offs can be a process in itself, as recent action has shown,” Frank Gretz, a technical analyst at Wellington Shields, said in a note to clients. “The process usually involves a so-called ‘test’ of the low or even a lower low. All of this could create some disruption to the seasonal pattern, which in itself is no reward.” Trading action throughout the week, including several weak closes in the last hour or two of trading, has raised eyebrows. The week’s counter-rallies have also raised suspicions among some. RJ O’Brien & Associates managing director Tom Fitzpatrick said in a note to clients that Thursday’s rally following the often-ignored weekly jobless claims report suggests “the markets are broken” and the rebound won’t last. “The trend here is for further short-term strength before more losses are likely,” Fitzpatrick said.
