Stocks Fall Friday as Yield Curve Inverts

 

March 22, 2019 – Stocks finished this week on the wrong foot. Friday’s dismal action erased the modest gains the market had put together over the previous four days.

Today’s action in stocks was, in part at least, a reaction to the action over in the bond market where yields on 10-year Treasuries fell below the yield on three-month notes. This inversion of the yield curve has been a pretty reliable indicator of a recession, so people tend to take it seriously. Of course, what an inverted yield curve doesn’t predict is when a recession will happen, it can be many months after an inversion before the economy actually begins to shrink. Inversions don’t typically correlate with stock-market tops either, so while it can be an important warning sign, it isn’t exactly a warning of an imminent collapse. 

If stocks were spooked by bonds, what pushed the yield on the ten-year down? Bonds started to rally (Higher bond prices mean lower bond yields) late in the day Wednesday after the Federal Reserve’s latest monetary policy statement. The central bank promised continued patience, while signalling that it was not planning additional rate hikes this year.  

That plan doesn’t exist in vacuum. The Fed famously claims to be “data dependent”. It hikes when the economy seems to be getting hot and inflation danger is high, and cuts when the economy is softening and unemployment starts to rise. So that cut to the projected number of interest-rate increases was accompanied by a cut to economic forecasts. That was enough to spook investors and send them to the safety of the Treasury market. 

Elsewhere in the market this week, Boeing’s struggles continued, while disappointing quarterly reports sunk the shares of FedEx and Nike. 

Meanwhile, the trade talks seem to have cooled. Once the March 1 deadline for imposing new tariffs was lifted, we stopped getting regular updates about how close the negotiations were to a resolution. At this point, it seems like the U.S. and China are quite a ways away from a deal. President Trump said this week that he wouldn’t remove tariffs from Chinese goods until he can verify that China is complying with the terms of a deal. Meanwhile, China wants to have the duties lifted as part of any deal. There are still several rounds of talks scheduled, but this seems like a pretty significant disagreement. 

Brexit meanwhile drags on. As of now, after an extension from the EU, Britain will leave the UK on April 12, unless parliament can pass an agreement which would extend the leave date to May 22. Parliament has already voted against May’s deal twice, so it is hard to imagine a third vote turning out any differently. As we’ve said before, it is hard to ascertain the direct effects o the U.S. economy from Brexit, but it seems likely that it will suppress economic activity in much of Europe, which is a major source of U.S. exports.

Indices

All told this week, the S&P fell -.77%, the Nadsaq lost -0.6%, and the Dow Jones dropped 1.34%.

This week we will be looking at the major indices on 3-month charts. The support (dotted lines) and resistance (solid lines) will be the same as last week, which can be viewed here if you’re interested to see on yearly charts why support and resistance exist at these levels.

S&P 500

It is a positive sign to see the S&P 500 hold above the 2,800 level, albeit barely. This is a strong level of support/resistance that has sent the index into reverse on numerous occasions since the beginning of 2018 and will hopefully now serve as a strong level of support. The S&P flirted with resistance around 2,860 twice this week, and it appeared that it may continue to ride its 8-day moving average (red line) until it could find the strength needed to power through. After dropping below the 8-day on Friday, the index found support at 2,800. The additional support from its 20-day moving average (blue line) converging at 2,800 will hopefully be strong enough to keep the S&P on the right side of support. Should the S&P fall below 2,800 next week, its next strongest level of support will be its 200-day moving average (purple line).

Nasdaq Composite

When the Nasdaq opened above the 7,700 level Monday, it appeared this newly acquired level of support in combination with its 8-day moving average would hold. Unfortunately, the big move on Friday turned the 7,700 level back into resistance. From a technical standpoint, the Nasdaq has a lot of strong support should the index continue to decline next week. The levels of support at 7,600 and below are stronger, with stronger moving averages there to assist. The Nasdaq’s 20-day moving average converging with support at 7,600 should be strong, but if that doesn’t hold, the 7,500 level of support is considerably stronger with the assistance of the 200-day moving average.

Dow Jones Industrial Average

The Dow Jones briefly gained a level of support around 25,800 but was sent into reverse when testing resistance around 26,200. With the Boeing’s problems continuing and several Dow stocks posting disappointing earnings and/or guidance, that newly acquired level of support couldn’t hold, despite help in the form of its 8-and 20-day moving averages. While the 25,400 level of support is strong, the 25,200 level will be the most likely opportunity for a bounce with the help from the 200-day moving average. The strongest level of technical support is 25,000, but hopefully we won’t see the Nasdaq dip that low.

Russell 2000

The Russell really took a beating this week. The 20-day moving average really hindered progress over the past two weeks as the index continually bounced between the 20-day moving average and support at 1,550. Eventually, the 1,550 level couldn’t hold, and the Russell sold off hard. The index sold off so hard on Friday that even the convergence of its 50-day moving average (green line) at support couldn’t dampen its momentum. The support at 1,500 is strong, as well as the 100-day moving average (yellow line), but if selling continues, technical support will become weaker and further spaced below the 1,480 level.

 

EDITORS NOTE: This article was updated to correct the number of interest rate increase the Federal Reserve expects this year.

Bobby Raines

Bobby Raines

Bobby Raines is the Managing Editor of the Market Intelligence Center. He has degrees in Mass Communications and History from Emory & Henry College. Bobby worked at a mid-sized daily newspaper before making a switch to covering the financial industry full time in the years leading up to the financial crisis. He has been a member of the Fresh Brewed Media team since 2011 and has served as a writer and analyst. You can write to him at braines@marketintelligencecenter.com or follow him on Twitter: @BRatMICenter.

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