Stocks fell ended the week lower as rates spiked. Sellers showed up in droves after Jay Powell, The Chairman of The Federal Reserve, gave a speech and was more hawkish than expected. Mr. Powell said the Fed may take longer than expected before it stops raising rates. Within 24 hours, rates spiked hard and stocks were smacked.
Before the big sell-off, the canary in the coal mine was the small-cap Russell 2000, which I noted last week and talked about that in Tuesday’s pre-market update to FindLeadingStocks members. The reason why that is important is because the Russell 2000 was the first index to hit new highs after the Q1 sell-off and it was the first index to break down in this latest sell-off. Looking forward, the next two big events investors are focusing on are: earnings season and then the mid-term elections.
On Monday, stocks opened higher but sold off during the day. The big news came after Canada and the U.S. reached a deal in the 11th hour to replace NAFTA. The new deal will be named the United States-Mexico-Canada Agreement, or “USMCA” for short. The new deal will deliver more market access to U.S. dairy farmers, while Canada has effectively capped automobile exports to the U.S. Both nations, along with Mexico are expected to sign the agreement by the end of November.
The big sell-off came from the Russell 2000 when it decidedly fell below its 50 DMA line. That is a concern because the Russell was the first index to breakout and hit a new high after the Q1 correction. So the fact that it is breaking down now doesn’t bode well for the market. On Tuesday, stocks were mixed as the Nasdaq and small-cap Russell 2000 were lower for most of the day.
Stocks rallied nicely on Wednesday after the latest round of positive economic data was released. ADP, the country’s largest private payrolls company, said private employers added 230,000 new jobs last month, easily beating estimates for 185,000. Separately, the ISM non-manufacturing index hit its highest level in history which bodes well for the ongoing economic expansion.
Thursday & Friday Action:
Stocks fell hard on Thursday after the yield on the 10-year Treasury note jumped to the highest level since 2011, breaking above 3.2 percent. A slew of interest rate sensitive areas of the market fell hard on the news. Yields jumped after Fed Chairman Jay Powell said the Fed had a long way to go before it stopped raising rates. T
hat spooked the market and led many people to worry that the Fed will raise rates longer than expected. Stocks fell on Friday after the latest jobs report was announced. Before Friday’s open, the government said U.S. employers added 134,000 new jobs in September. The problem was that the the prior months’ readings were revised higher and that spooked the market.
Market Outlook: Pullback Time
At the end of September, I noted that the Russell 2000 broke below important support and said it should be watched closely. One week later, we saw a big sell-off on Wall Street as rates spiked. For now, it is important to analyze the health of this pullback to see if it turns into something severe or is another short term and healthy pullback. After the 50 DMA, the next big level of support is the 200 DMA line, then February’s low. If those levels break, look out below. As always, keep your losses small and never argue with the tape.