Failed market rally signals more trouble ahead for stocks

Published Thu, Jan 20 20225:30 PM ESTUpdated Thu, Jan 20 20225:37 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

The stock market's violent late-day reversal Thursday signals more selling ahead, as investors worry about a hawkish Federal Reserve and the earnings season. Stocks rallied early in the session for a second day before weakening significantly in the final two hours of trading. The S & P 500 lost 50 points, or 1.1%, to end the day at 4,482 — below the key level of 4,500. Thursday's reversal was especially wild, with the Dow Jones Industrial Average traveling more than 800 points between its high and low. The Dow ended the day off 313 points at 34,715. "Again, it's rallies are to be sold," Bleakley Advisory Group chief investment officer Peter Boockvar said. "Just technically, the S & P looks like it will test the 200-day moving average. Today, it busted through the 100-day at 4,576." The 200-day moving average, a widely followed metric representing the average level at which an index or stock closes over 200 session, was at 4,427. The moving averages are popular levels to trade around and often act as support. Boockvar said investors are nervous about the Fed's upcoming meeting next week, where the central bank could give more clues about how much, and when, it expects to start raising interest rates. Fed officials have forecast three interest rate hikes for this year and are ending their bond purchases, or quantitative easing, in March — sooner than expected. The futures market shows traders are expecting an even more hawkish Fed, with four or more quarter-point hikes priced in for this year starting in March. "The end of QE itself in March is an event in and of itself ... and the market was way too nonchalant with that. History shows that QE is good for the market when they're doing it, and not good for the markets when they're not doing it," Boockvar said. The Fed has been winding down its $120 billion a month in bond purchases and was initially expected to end in June. Boockvar said the violent trading shows how nervous investors are becoming about tighter monetary policy. "We were up 65 or 70 S & P points" before the sell-off, he said. "You start thinking about that, and it freaks everybody out." More selling likely to follow Evercore ISI's Julian Emanuel said there were clear signals during the market reversal that the selling is not over. "Given the level of uncertainty surrounding the Fed, I wouldn't want to say that would be the extent of it," said Emanuel, Evercore chief equity, derivatives and quantitative strategist. "You have to see how the combination of 'FANG' earnings and the Fed plays out. That's not likely to make things any more certain." Netflix — a member of the popular FANG group — lost nearly 19% after Thursday's close on slowing subscriber growth , and investors are looking forward to Apple and Microsoft earnings next week. Other members of FANG - Meta Platforms, Amazon and Alphabet report in early February. Emanuel said he became convinced that the S & P 500 is heading to its 200-day moving average, after the Nasdaq 100 broke through its 200-day at 15,000 Thursday afternoon. The Nasdaq 100 ended the day down 1.3% at 14,846. "We would absolutely expect buying to come in at the 200-day moving average [in the S & P 500], and we're open to that being a medium-term bottom, but there's no evidence yet that it will be a medium-term bottom in the S & P," he said, adding that investors need to show more fear. "We'd rather see the VIX spike to the mid to high 30 s before we thought an attractive entry point has been reached." The CBOE's Volatility Index ( VIX) — which reflects trading in puts and calls of the S & P 500, and is known as Wall Street's fear gauge, ended Thursday up 7.3% at 25.59. "The key is when you get to these moving averages, the intestinal fortitude of the holders gets tested. You know when you're in a decent market when these key levels hold, and you know you're in a changed market when you start to slice through them," said Boockvar. Scott Redler, chief strategic officer of T3Live.com, said the S & P 500's breakdown through 4,500 signals more downside ahead. He has targeted 4,320 as a low, expecting the S & P 500 to lose about 10% in total, and the Nasdaq to fall another 5% to 6%. "The trend of the market gapping up in the last two sessions and then falling at the end of the day is adding to the bearish signals the market has already shown," he said. "That prolonged the inevitable which feels like a lot lower prices. "

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, January 12, 2022.

Brendan McDermid | Reuters

The stock market's violent late-day reversal Thursday signals more selling ahead, as investors worry about a hawkish Federal Reserve and the earnings season.