An Emotional Market Takes It on the Chin
Investors have been given a convenient excuse to take profits and move to the sidelines as headwinds gain traction.
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The post-election euphoria ended with a thud on Thursday and Friday as concerns about inflation and hawkish comments from Fed Chair Jerome Powell gave investors a convenient excuse to take profits, raise cash, and move to the sidelines.
The action on Friday was particularly ugly, with breadth more than two to one negative, and the Russell 2000 IWM sinking by 1.5%. All the indexes are back down into the gap area that was formed on the morning after the election. The gap is not yet filled, but the Nasdaq 100 QQQ and Russell 2000 don’t have much further to go.
Magnificent Seven names have been consistently laggards lately, but biotechnology stocks IBB, with a loss of 12%, had its worst week since March 2020 when the Covid pandemic was hitting. One bright spot was Bitcoin. IBIT was up nearly 5% on Friday and continued to attract strong buying.
Next week, earnings from Nvidia NVDA will take center stage, but the key issue will be sticky inflation and the likelihood of a Fed quarter-point cut at its meeting in December. There is still strong economic optimism, but the strong dollar and higher interest rates are a headwind that is gaining some traction.
The big technical issue will be how quickly stocks can find support. The likelihood that the election gap will be completely filled is quite high, but if that happens, that will be the natural spot for shorts to cover and buyers to buy the dip.
While I remain optimistic about stock picking in the next six weeks, elevated volatility is going to make it challenging. We have an emotional market right now, and inflation worries are likely to continue to be a problem.
Have a good evening. I’ll see you on Monday.
At the time of publication, Rev Shark was long NVDA.
