The downswing potential I warned about yesterday, came. Heavy selling continued as the Fed threw cold water in assessing the pace of the recovery, and didn‘t signal readiness to prop it up even more than it does currently. That‘s a disappointment even though nobody really discusses V-shaped recovery anymore. Its pace is uneven – one of the few things that were quite „equally distributed“ yesterday, were sectoral losses in the S&P 500.

The investors jumped on the selling bandwagon, confirming my yesterday‘s reservations:

(…) We have the Fed meeting later today, and while I am not looking for hawkish surprises or any outright optimism, the investors aren‘t taking chances. Sell now, ask questions later seem to be the mantra before the U.S. open.

With volatility spiking to levels unseen since September and October 2020, the question on everyone‘s mind is whether this is the start of another corrective move, and how fast would stocks recover. Make no mistake about it, they will recover – the bull isn‘t over by a long shot, and as I‘ve written in my Monday‘s 2021 prognostications, this year will be still a good one for stocks.

Let‘s assess the damage yesterday‘s selling has done, and look at the course ahead (charts courtesy of www.stockcharts.com).

S&P 500 Outlook

The selling wave in the S&P 500 didn‘t stop with yesterday‘s Fed and picked up steam instead. While the daily indicators flashed their sell signals, this doesn‘t rule out stabilization next, which would disappoint those calling for a (10% or similar) correction. The bull market is intact, and one tough Fed assessment of the situation on the ground, won‘t end it.

Credit Markets

High yield corporate bonds to short-term Treasuries (HYG:SHY) held up much better than stocks did, and investment-grade corporate bonds to longer-dated Treasuries haven‘t broken below their recent lows either. Unless they do, that‘s a good sign for stocks to get their act together, regardless of the weak price recovery attempts thus far.

The ratio of high yield corporate bonds against short-term Treasuries (HYG:SHY) with the S&P 500 overlaid (black line) shows how far the very short-term vulnerability in stocks that I highlighted yesterday, had reached.

While I did strike an optimistic tone in the runup to Tuesday‘s regular session open, the bulls missed a good opportunity to act, and the resultant signals favored the bears to step in on Wednesday, which they did. Changing the tone, that‘s the essence of my trading style – assessment of momentary outlook, and drawing conclusions accordingly.

So, what about follow-through selling and the reflexive rebound – which of the two would win the day?

More S&P 500 Clues

The Force index in S&P 500 plunged deeply into negative territory. Short-term damage has been done while Bollinger Bands (a measure of volatility) barely budged, and both moving averages‘ slope remains intact. As I have called publicly and verifiably outside of my website at the onset of today‘s Asian session that we‘re likely to witness partial recovery in today‘s regular session, it appears well underway.

With the dollar stuck deep in its bear market as one more sign of the inflationary storm striking this year, who would want to take the other side of the trade?

The spread between 3-month and 10-year Treasuries shows that the game hasn‘t really changed. That has also made me vocal about not getting scared out by yesterday‘s slide in stocks.

Where is the rally in Treasuries (TLT ETF)? The intraday performance would have been expected to be much better thanks to the gloomy Fed views. Yet it wasn‘t. While Treasuries may pause at these levels or even rise next, they don‘t look to me to exert momentary pressure on stocks in any way.

Long upper knot, selling into temporary strength, that‘s all there was to a dollar rally? That‘s another clue that stocks have overreacted.

Summary

The anticipated downswing brought a bloodbath across the board, and it indeed enticed the buyers to act – just as the odds favored. Gold held relatively well, and none of the other indicators were in place to declare the move to be the start of a real correction. My open long position is in the black! Again, see today‘s action for proof that the bull market wasn‘t endangered in the least…