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The legendary baseball catcher Yogi Berra could sure help us out in understanding the current investing environment. He famously said, when giving directions, “When you come to a fork in the road, take it.” The problem is, he didn’t elaborate which fork to take. I think the stock market reached a fork in the road last Thursday, and I am not sure which fork it will take from here, but we’ve seen this “fork” before:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
What the stock market did last Thursday is called a “bearish engulfing pattern,” a classic reversal where stocks open very strong and then experience a heavy volume selloff to close near the lows of the day. That has already happened three times this year and the last time it happened, I mentioned it in this column.
Of the three bearish engulfing patterns so far this year, the last two were bigger in daily range. The April instance was over 100 S&P 500 points in a daily range, while the one last Thursday was 95 points. The one in April signaled a 6% drawdown in the S&P 500 (SPX), which is huge. The one in March, however, was reversed seven days later with no large downside following the reversal, clearly a more “favorable” fork.
So, having a “bearish engulfing pattern” is no guarantee of seeing a bearish reversal.
To make matters more complicated, Nvidia (NVDA, NVDA:CA) was expected to generate a big reaction from investors on the opening last Thursday. Last August, when the company reported quarterly results, the market experienced another bearish engulfing pattern that did not immediately produce a downside move (it corrected in September). This is because expectations for the company are very high, even when Nvidia delivers good results, since the market tends to rise sharply going into the report, making market selloffs more likely.
From a tactical perspective, some kind of trading range is to be expected, even though the NASDAQ 100 Index (NDX) was very strong on Friday, so the possibility of an AI-hype runaway market has to be considered. So, as confusing as it may sound, it sure looks like the high for the S&P 500 Index may stick for a while, but until I see sustained trading below the lows of last week, I will not assume anything.
What Could Pressure Stocks in June?
I don’t like the fact that the 10-year yield has trouble staying below 4.40%. Ideally, the 10-year needs to take out 4.32% and head lower, but that may be wishful thinking at this point. Some economic releases last week came in on the hot side, and if we get more of these, we may see a rebound in yields.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The U.S. economy has puzzled many observers, as most economists that know anything about econometric models would have guessed that after 5.25% basis points’ worth of Fed rate hikes in a short period of time, there would have been a recession, or at a minimum, a bigger slowdown than what we got.
I think that if we rise above 4.74% on the 10-year rate in June, stocks will flirt with the April lows and if we head towards 5%, the April lows in the stock market may not hold. Based purely on this nasty uptrend of higher lows, the 10-year Treasury yield (US10Y) has not topped out yet, which is a necessary prerequisite for the broad market to move higher. It seems to me that the bond market also has reached Yogi Berra’s famous fork in the road, and it is not quite sure which way the market will turn.
Navellier & Associates owns Nvidia Corp (NVDA), in managed accounts. Ivan Martchev does not own Nvidia Corp (NVDA) personally.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclaimer: Please click here for important disclosures located in the “About” section of the Navellier & Associates profile that accompany this article.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
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