STOCKS REGAIN EARLIER LOSSES FOLLOWING OUTBREAK OF WAR IN EUROPE -- LONGER-RANGE TREND NOT ENCOURAGING
SELLING THE RUMOR AND BUYING THE FACT... Thursday morning's heavy selling of stocks and the buying of traditional safe havens like bonds, gold, and oil reversed sharply that same afternoon. Stocks rose while safe havens lost most of their morning's gains. That more positive trend continued on Friday. As a result, the S&P 500 and Nasdaq 100 ended the week with modest gains. The Dow Industrials ended the week basically flat. At the same time, bond prices lost ground as did gold which gave back all of its Thursday morning gains. West Intermediate crude oil ended the week modestly higher near $92.00 which was below the $100 price it reached on Thursday morning.
FOLLOWING WAR PRECEDENT... This week's early stock drop and late reversal followed the pattern seen at the start of previous wars. I remember it happening at the start of the two Iraq wars. In both instances, stocks fell in the weeks leading up to both invasions, while gold and oil surged. After the invasions started, those trends reversed as investors sold gold and oil and bought stocks. A TV report this week mentioned that same pattern taking place in ten of eleven previous wars. It may also have been a case of selling the rumor and buying the fact. The bigger question, however, is whether this week's rebound marked an important bottom, or an oversold bounce in a larger downtrend.
WHAT ABOUT THE FED... Part of the late buying of stocks may also be based on the belief that the war in Europe might cause the Fed to be less aggressive in raising rates starting in March. While that may be true, expectations for higher inflation leave the Fed little choice but to tighten monetary policy by raising rates high enough to slow the inflationary spiral. Economists are already talking about the possibility that rising rates could push the U.S. economy into recession. That wouldn't be good for stocks. The three charts shown below put this week's rebound in perspective.
A LOT OF OVERHEAD RESISTANCE... The charts below show all three major stocks rebounding this week from a deeply oversold condition. Thursday's key reversal day from down to up also marked a short-term bottom for stocks. The market's larger trend, however, still looks more negative than positive. All three indexes still remain well below their 200-day moving averages which usually signals a negative picture for stocks. In addition, there are a lot of overhead resistance barriers that would have to be overcome to improve the market's longer term prospects. So while this week's rebound is encouraging for the market's short-term trend, a lot of factors suggest a more cautious attitude on the market's longer-term trend. A lot will also depend on how the market reacts to the Fed's anticipated hiking cycle.
