Bull Markets Take the Stairs and Bear Markets Take the Elevator

After two days of market nastiness, it doesn’t look like the sellers are done. It’s Wednesday morning, and S&P 500 futures are down 25 points as I write…

The market got downright giddy last week. On Thursday, the S&P 500 made a wingnut 140-point move higher to break the downtrend line at 4,054. From Friday's 4,100 peak, the S&P has now given it all back… and then some.

A headline I saw this morning sums up why last week’s rally was a wingnut move: “It’s become increasingly clear the Fed can’t stop yet” regarding rate hikes.

I mean, duh.

There was never any real reason to think the Fed was about to stop the rate hikes. Inflation has barely ticked down. But making money and having a good rally can be a pretty good incentive to suspend disbelief.

Economic data has come in strong for the last couple of days, and that’s driving stocks lower. Simply put, all the Fed’s rate hikes are not slowing the U.S. down enough to affect inflation, and that’s troubling…

Because we’re at 4% right now, another 0.50% is coming next week, which will take it to 4.5%. There are Fed meetings in January and March. Will a couple of small hikes at those two meetings – to 5% of 5.25% – achieve what all the previous hikes haven’t?

That seems very unlikely, and that’s why investors have suddenly turned so pessimistic this week.

There are a few canaries in the coal mine we can look at:

Bank of America (NYSE: BAC) got absolutely hammered yesterday, down more than 5% from its lows. It’s the biggest consumer bank, and the prospect of higher rates and a weaker consumer is not a good combo for it.

The Volatility Index – the VIX – measures pessimism and has jumped from 19 on Friday to nearly 23 this morning.

Oil tends to move in tandem with economic growth expectations. Growth means resigning demand and higher prices. China’s moves to end COVID lockdowns should mean a substantial boost for economic activity, but crude prices have dropped from ~$80 to $75 a barrel over the last couple of days.

If there’s any consolation in all this, it comes from the old saying that bull markets take the stairs, and bear markets take the elevator. In other words, big declines happen fast. And that’s certainly been true this week.

In fact, the selling has been so severe that prices have fallen all the way to a fairly nice support point: 3,920 on the S&P 500. That level has been hit a couple of times in the pre-market, and we could see a bounce off that level today…

That’s it for now, take care, and I’ll talk to you soon.