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Stock Market Fallout: How To Tweak Your Investment Strategy

The stock market has been struggling the last few days, losing all gains made earlier this month (March). It’s almost as if there’s a tug of war between investors and the news. In the last couple months it was between investors and the Fed but now investors are facing a bigger hurdle—the SVB Financial Group (SIVB) fallout.

The State of the Stock Market

In the more recent past, Fed Chairman Powell’s comments about possibly continuing to hike interest rates would shift investor sentiment. During Powell’s testimony on Capitol Hill, hawkish comments impacted the stock market. Equity indexes fell, Treasury yields rose (the two-year US Treasury yields, $UST2Y, went higher than 5%), the CBOE Volatility Index ($VIX) rose, and the US dollar inched higher.

The S&P 500 just didn’t seem to be able to hold on to its gains of the first two trading days in March. In its last up leg, it didn’t make it to its last high and instead stalled at its 20-day moving average with a shooting star candlestick pattern before selling off.

The S&P 500 Index ($SPX) has fallen below its 200-day moving average, and it’s in a clear downtrend. The next support level is at around the 3800 level. If the index falls below this level, it could retest the October lows. And if you look at relative performance, 10-year US Treasury yields and the US dollar are performing better than the S&P 500. Note: Click on chart for live version.

CHART 1: S&P 500 INDEX TRENDING LOWER. If the index stays below its 200-day moving average, the next support area is below the 3800 level. Chart source: StockCharts.com. For illustrative purposes only.

The Dow Jones Industrial Average ($INDU) and Nasdaq Composite ($COMPQ) followed similar patterns. And the S&P 600 Small Cap index ($SML) really got hit hard. A large chunk of it (17.9%) is allocated to the Financials. In light of the banking fiasco, that shouldn’t be a surprise. The Financial sector was the worst performing sector on Thursday. And we could see it continue given that the banking turmoil is just starting.

Investors are spooked. Just look at how much the probability of a 25 or 50 basis point interest rate hike by the Fed changes from day to day. If you monitor the CME FedWatch Tool, you may have noticed that after Powell’s testimony the probability of a 50 bps hike rose to 72% but went back to lower than 50% on the negative news from a couple of banks. So, as it stands right now, it could go either way—the Fed could raise interest rates 25 or 50 bps.

Don’t let what’s happening in the banking sector distract you from inflation, though. Today’s jobs number—311,000 vs. 225,000 estimated—came in hot which means jobs will probably continue to feed inflation. But unemployment rose to 3.6%, higher than the 3.4% projected rate and wage growth is slowing. So mixed messages from the February jobs report but perhaps a little bit of hope that inflation is going in the right direction.

But the jobs data came at the same time as a pretty ugly event, one that’s more painful than the pain inflation is creating for your wallet. When a bank that’s a big lender to many tech companies fails, it’s not a stretch to think it’ll bring back memories of the 2008 financial crisis. The first thought that could go through investors’ minds: which bank is next?

The market is feeling the impact. Treasury yields fell. The two-year yield, which was above 5% after Powell’s comments, fell to 4.62% and the 10-year fell to around 3.75%, below the 4+% it hit earlier this month.

It’s Worth Looking at Bonds

When the market is so dependent on news—going up when the data supports cooling inflation and down when inflation appears to be hot—the investing landscape becomes more complex. Is it time to panic sell or is it time to pick up some value investments?

Of late, every time the market has sold off, buyers have come in and sparked a rally, albeit short-lived ones. But after SVB’s shutdown, investors seem to be running to bonds. Take a look at the chart of iShares Trust 20+ Year Treasury Bond ETF (TLT). It’s approaching its 200-day moving average, and if TLT moves above its February 2 high of 109.08, it could indicate that bonds may be having their time in the sun, after a long hibernation. Note: Look at chart below for live version.

Watch to see if the market finishes this ugly week on an uglier note or if there’s some recovery at the close. There’s no way of knowing if this bearish run will be short-lived. The stock market has been in a critical juncture for a while and investors have been looking for the market to provide some direction. It looks like the direction may be lower. It may be time to revise your investment playbook. Regularly analyze Your Dashboard and identify which areas of the market are performing better than others.

If bonds start showing strength, after their long hibernation, you may want to start modifying or building bond ChartLists. Another area to regularly visit is the Market Summary. If the markets start shifting in one direction, these tools will help you identify which areas of the market you should be investing in.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

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