Stocks fell this morning as the market’s massive rally of the last few weeks stalled. The Dow, S&P, and Nasdaq Composite all slid modestly, while mixed corporate earnings were reported pre-market. Tyson Foods (NYSE: TSN) disappointed shareholders and saw its shares fall roughly 5% in response.
On Semiconductor (NASDAQ: ON) also reported earnings, beating estimates. ON rallied 1% through noon after opening significantly lower on the day.
Overall, though, today’s retracement had less to do with earnings than it did the magnitude of the bear market rally. With the S&P now elevated well above its lows of late December, sentiment has faltered slightly.
“Investors are still looking to selectively do some profit-taking on the heels of a very strong January,” said AXS Investments CEO Greg Bassuk.
“But also what we’re seeing is continued investor nervousness and uncertainty without more consistency in corporate earnings, economic data, and Fed policy.”
That’s all certainly true, and eventually, this rally will end.
But when? The stochastic indicator is showing bearish divergence (a double top relative to the S&P’s higher high). The S&P also set a higher low for the first time since December 2021, and the most recent rally remains above its trend lows (yellow trendline), although the S&P did touch that trendline this morning before bouncing off it.
Until the S&P closes below its bullish trend and the 10-day moving average, this rally is still very much alive regardless of what the stochastic indicator shows traders.
Thankfully, for bears, a very “sellable” moment approaches tomorrow when Fed Chairman Jerome Powell speaks before the Economic Club of Washington. Last Wednesday, Powell’s (possibly unintentionally) dovish comments in his post-FOMC speech spurred the ongoing rally even higher.
“We think the Fed’s embrace of disinflation is genuine, and it was always going to be difficult for Powell to send a hawkish message after decelerating the pace of hikes for the second time in as many meetings,” said Bank of America analysts in a note to clients.
Powell has a chance tomorrow to hammer stocks lower if he so chooses. Powell will also have an opportunity to speak about last Friday’s jobs report, which revealed a massive beat thanks to a record-setting seasonal adjustment (+3 million jobs vs. an unadjusted 2.5 million payroll loss).
“Job creation in January was eye-popping and contrary to the market narrative earlier in the week of the Fed not only pausing but reversing course and lowering interest rates later this year,” wrote Yung-Yu Ma, chief investment strategist at BMO Wealth Management, in a note.
“Unless this labor market strength turns out to be a one-month blip, the hawks on the Fed are likely to dig in and keep rates higher for longer.”
One theory for the giant seasonal adjustment last month is that the Fed wants a valid reason to hold rates higher longer than expected. This, of course, assumes that Powell has sway over what the Bureau of Labor Statistics reports each month. Whether that’s true or not doesn’t really matter.
What does matter is that the Fed takes each jobs report at face value. 517,000 jobs added last month (plus record-low unemployment) won’t make Powell want to cut rates any time soon. That has investors concerned.
And they should be, especially after bulls encountered their first major hurdle following several weeks of huge gains.
