Stocks Drop Sharply on January 18, 2022 As Yields Surge

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1/18/2022

STOCKS – MSFT, T

MACRO – SPY, IWM, XBI, 5-YR REAL

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Stocks finished the day sharply lower, with the S&P 500 dropping by 1.84% and the Qs falling by 2.49%. Today, the Russell fell over 3%, with the Biotech XBI ETF dropping almost 6%.

The selling was pretty intense as rates pushed higher. The 5-Yr TIP rate moved up to -1.165% today. It seems at this point; there is an excellent chance the real yield broke out and is only going to run higher from here. Like I have noted a few times now, it could run to -50bps.

If that is the case, the carnage for stocks is just beginning. Valuations across the entire equity market need to reset lower. It will be ugly and painful. It seems it may only be a matter of when this reset happen. But there is a very good chance this process has already started. How high real yields rise will be dependent on how high nominal rates rise, but more importantly, how far inflation expectations fall as the Fed starts to hike rates.

 

The last time real yield rose this sharply was during the taper tantrum in 2013. But remember in 2013, the S&P 500 was trading around 13 to 14 times its next twelve month’s earnings estimates. This time around the S&P 500 is trading near 21, the impact will be greater. I went through this an a lot more in today’s video for subscribers of Reading The Markets (Get the First two-week free to try: RTM- Watching Rates For Next Leg Up)

S&P 500 (SPY)

So that pushed the S&P 500 lower, closing right at support around 4575. That also led to the index falling to the bottom trend line of the diamond pattern. We have only two options left at this point of the pattern, a move higher and gap fill from Friday’s close at 4660, or a break below support and the start of another big move lower. We have been talking about this pattern for weeks, and it would be nice to move on to the next chapter now. A drop below the trend line results in a decline I think to 4360 or so.

Russell (IWM)

The Russell finally broke support today. It was the 8th time the index touch the 2137 and this time just proved to be too much. That is now clearly a very strong resistance level. The next support level comes at 2000. If that doesn’t hold it is a long way down.

Biotech (XBI)

The Biotech XBI ETF fell 6% today, wow. This is just screaming to fill the gap at $86.

Microsoft (MSFT)

Microsoft agreed to buy Activision in a deal worth almost $70 billion. I’m not sure how I feel about it, it makes sense from a vertical integration standpoint, but Activision is expected to do about $9 billion in sales in 2022. Meanwhile, Microsoft is expected to do $225 billion in sales in 2022. It really is like a rounding error for Microsoft to some degree. The stock fell below support at $305, and that does set up a potential decline to $282.

AT&T (T)

AT&T today climbed back up to its 200-day moving average, and that is where it stopped. With earnings coming up the stock may get the chance to push higher perhaps back to $28.50.

That will be all.

-Mike

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