- Equity markets continue to fall on Friday.
- Some riskier assets outperform such as Tesla.
- Apple remains stable as iPhone 14 initial reports look promising.
Equity markets remain under pressure as Friday brought yet more losses. The S&P 500 closed down 0.7%, while the Nasdaq closed 0.5% lower. This outperformance by the Nasdaq is often a “tell” of an impending rally. The Nasdaq is more volatile and more susceptible to interest rate moves, so on a down day the normal expectations would be for it to fall a greater percentage than the S&P 500.
We also note Tesla outperforming as it closed flat on Friday. Again Tesla is more volatile and has a higher beta. It would be a greater risk asset due to its larger retail support base. The only caveat is the meltdown suffered by Bitcoin again this morning. Currently down 4% at $18,600, there is a strong correlation between Bitcoin and the Nasdaq. All eyes will be on Wednesday’s interest rate decision from the Fed.
While it is widely expected that the Fed will raise rates by 75 bps, it is the commentary accompanying this more important decision that will count. The Fed is expected to be more clear on its commitment to fighting inflation as its last mixed message caused a massive risk-on rally. The Fed likely does not want a similar outcome this time round. The added data point from last week’s CPI will ensure a more measured and likely hawkish tone from Fed Chair Powell in the post-decision press conference. With this outcome largely anticipated, the reaction of risk assets will be key. How will the Nasdaq react to a higher path of interest rates? We may get a short-term rally, but the medium-term picture continues to look darker for the Nasdaq and SPY.
We have seen more bullish setups on some of the constituent stocks of the SPY, but the SPY itself does look more bearish. For example, the bearish island formation was replicated in Tesla, but the stock has since moved back to bridge the island formation. The SPY remains bearish. We also got a significant break of the double bottom at $389. This is our pivot and will need to be broken if we are to get a short-term rally. Positioning and sentiment point to a short-term rally, and also a bearish position closing head of Wednesday could add to this argument.
All action is likely to remain choppy though until after the Fed speech. Then we will take our cues from the path of interest rates. Already with 1-year treasuries yielding nearly a risk-free 4%, it looks too tempting to shelter there. That means equities may struggle long term, especially if the Fed signals higher rates for longer.
SPY daily chart