Has The US Stock Market Bottomed?

On the 20th of May 2022, the S&P500 briefly fell into the official bear market territory, dropping over 20% from its all-time high. The S&P500 didn’t remain in the bear market territory for long and has continued to recover ever since. The jury is now out as to whether the US stock market has bottomed and will continue its bullish trend.

Today, we are digging deeper into the underlying mechanics of the US stock market and will analyse the recent price action of the NASDAQ and the DXY (US dollar Index).

Firstly, what is driving the market?

2022 has been all about interest rates, surging inflation and geo-politics. Since the FED pivoted from the “transitory” story, global stock markets have sold off heavily. This year, the interest on the US 10 year has risen sharply from roughly 1.5% to highs of 3.21%. As the market has re-adjusted to the year-end US interest rate projections, equity has rotated out of high tech, high growth stocks – which tend to perform well during periods of low-interest rates, and into safe-haven assets.

Notably, the USD or DXY has benefited majorly from that. The US Dollar index (DXY) has rallied over 10% from the start of 2022. As expected, the FED has taken an aggressive monetary policy tightening stance in an attempt to combat inflation. The FED hiked rates by 0.5%, its largest rate hike in 22 years. The market is expecting a series of interest rate hikes from the FED from June through to the end of the year, which is why the DXY has been a top-performing asset this year.

Currently the market consensus is a 100% chance of an interest rate hike in the next two FED meetings and roughly a 70% chance of an interest rate hike in September. Recently, there has been a series of concerning economic data points around the world which is raising the question as to whether the FED will stick to their guns, or take their foot off of the aggressive rate hike stance in September.

China has faced a prolonged period of Covid-19 lockdowns due to their no covid policy. This has resulted in China abandoning this year’s GDP growth rate target of 5.5%. Premier Li Keqiang has conceded that China’s economy is stalling at a dangerous rate and faces critical risks, as he instructed an army of officials from across the country to exhaust all measures to stabilise the economy. Manufacturing data is down indicating a slow down in the global demand for goods and services. As the saying goes, when China contracts the whole world feels it.

Secondly, the US reported a negative GDP growth rate of -1.5% for the last quarter, another quarter of negative GDP growth would signal an official recession. We are in a macro-economic environment of high inflation and a slowdown in productivity. With this in mind, and concerns of an economic slowdown, bets are growing that the FED may need to take a break from raising interest rates by September.

If this is the case, the equity market may have overextended to the downside as investors and traders would have priced in a more aggressive rate hike path into the year end. Whilst a slow down in the global economy could hurt individuals, the stock market appears to want and need negative data.

 

DXY Weekly Chart

The US dollar index is generally classed as a safe haven currency or asset, and tends to perform well during times of economic uncertainty, political tensions or war/conflict. The start of 2022 has been no different with the DXY surging to the upside reaching a 5 year high. Investors have rotated out of assets that performed well during the “easy money policy” from the Central Banks during the recovery from the Covid-19 pandemic and into the safe havens.

Since the negative economic data in May, the DXY has taken a sharp turn to the downside. A number of technical indicators are suggesting a major market cycle top is in place, and the next move on the US Dollar Index is to the downside. The weekly MACD is close to crossing over which has been a strong indicator of a major reversal previously. If investors are rotating out of the DXY due to the possibility of a lower year-end interest rate, the move to the downside in the stock market may also be over extended.

NASDAQ Weekly Chart

The start of 2022 has been very concerning, whilst the Covid-19 market crash felt more severe, the recent price action has continued to grind to the downside and has exceeded the Covid-19 market crash. Investors are now watching for signs of a possible bottom in the market. If the DXY has topped, and investors rotate out of the global currency reserve, there is a chance for investors to pick up stocks and equities at a 30% discount. The MACD and RSI readings on the weekly time frame are indicating a slow down in selling pressure. There has been a number of reversals on the NASDAQ when there were similar readings previously.

As an investor or trader, dips of this magnitude provide huge opportunities from an investment and trading standpoint. Whilst it is far too early to call a bottom, there are signs of selling exhaustion in the short term. It is no coincidence the DXY has reversed at the same time as risk assets like the NASDAQ. This is indicating a potential change in psychology and momentum in the market.

The recent market low at 11,500 will provide a key invalidation level for any bulls stepping back into the market. And on the DXY, a break above the most recent swing high at roughly 105.00 will provide a bearish invalidation level.

From a technical perspective, there needs to be a higher low on the NASDAQ and a lower high on the DXY to confirm a short term reversal.

Be fearful when others are greedy, and greedy when others are fearful – Warren Buffet 

By all means, the market is very fearful at the moment with recession headlines showing up all over the media. We are not suggesting to load up on all equities and stocks, but what we are suggesting is get yourself ready to take advantage of the huge discount in the market. The Trading Floor is ready to capitalise on any move higher on the NASDAQ, and are also watching the currency market closely for indications of a move lower on the DXY.

If you would like to discuss trading the financial markets in more detail, we have opened up FREE consultations where we are discussing potential opportunities across the US market.

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