Throughout most of 2021, “just buy the dip” became something of a meme. Every slight drop in stock markets was an opportunity to buy, before those same indices usually went on to put in another leg higher.
That seems like a lifetime ago now. Since November 2021, the US100 has really struggled. The Russia-Ukraine situation has added more fuel to a fire that was already burning with the threat of aggressive Fed rate hikes…
Here’s a chart of the US100 since early 2021:
We can clearly see the “Buy The Dip” mentality, especially from May onwards. The highlighted green area is where everything started to go wrong. Those green lines aren’t any form of technical analysis, more a way to highlight that since the November high, US100 sellers have been in control.
After a period of consolidation, the US100 made a final push for new highs in December, failed, and the trend has been lower ever since. Below the 200DMA with volatility picking up in 2022.
The US100 is now approaching official correction/bear market territory, down over 20% from the highs and nearing some very key levels on the chart.
A couple of themes to closely monitor:
- Fed Tightening
- Russia Escalation Or Stabilisation
It’s tough to game out the exact scenarios, but here’s the logic.
Equities were increasingly fearful of a rapid tightening cycle from the Federal Reserve. Ironically, the Ukraine conflict may lessen the odds of this. Rates markets are already reducing the probability of a 50bps hike in March to below 20%.
This alone probably isn’t enough for a US100 bounce, especially while everything is so uncertain and the true extent of Putin’s ambition remains unclear.
And sentiment rarely moves in a straight line for too long… Especially in a fast-moving news environment such as this. As new information surfaces, shorts may see the chance to cover as longs jump in to chance their arm and take on some risk.
If/when this happens the relief rally can be just as sharp as the original selloff.
What might cause opinion to shift…?
To throw a blanket on it, anything that lifts uncertainty and relieves the information overload.
For example, once the sanctions are announced, Putin’s motives are clearer and/or negotiations taking place, markets will look to reprice the probability around these events. Of course, this can go both ways depending on the ‘certainty’ that’s uncovered.
But the picture still isn’t all that rosy. Even if some kind of resolution is brokered with Russia, the increase in energy and other commodity prices could lead to a stagflationary environment, and the Federal Reserve’s response to this is hard to nail down.
When economic growth and inflation are rising together, the Fed is far more likely to raise rates without thinking twice.
When economic growth is slowing, but inflation remains rampant largely due to risk premiums, supply constraints and trade uncertainty, that’s a far harder call to make.
For now, seeing anything with certainty looks like a fantasy. Keep your wits about you!
Not investment advice. Past performance does not guarantee or predict future performance.
