Charting the worst market in over 30 years of trading towards a hard landing

Introduction

If it feels like we are living in unprecedented times. Let me show you some of this week’s charts that have reached levels I have never seen before in over 30 years of trading. Some of these charts have even reached levels never seen in the history of the American markets.

This article offers some key charts from my recent market articles as we continue to analyze one of the worst markets of my life:

I have no desire to be pessimistic, but as long as the Fed maintains its record pace of draining liquidity from the markets and raising rates to historic lows to fight inflation, the only result I see will be a landing brutal.

Analyze the market

You can find more context for these charts in market articles, but my goal here is to quickly illustrate a wide range of amazing market conditions to consider.

S&P 500 Index Fund (SPY) Monthly chart illustrating QE/QT relationship and much higher volatility in downtrend channels than in positive uptrend channels. A probabilistic technical interpretation suggests that the S&P 500 is heading for a test of 3250 support of the positive channel from 2009. The Nasdaq 100 (QQQ) index fund chart is quite similar. So far, this negative channel descent shows an orderly bearish stair pattern without any of the double-digit sell-off percentages we’ve seen in 2018 and 2020.

The chart below shows the Federal Reserve’s balance sheet holdings of domestic securities for 2022 in trillions of dollars. The increase shows quantitative easing (QE) additions to the balance sheet for 2022 that ended the week of March 9. Then QT started in week 25 of this year and accelerated lower as the Fed promised through September and October to return to 2021 levels. As seen in the SPY chart below above, there is a strong correlation with the Fed’s stimulus and the removal of that stimulus which was used to help markets through the Covid pandemic in the largest Fed intervention in history.

S&P 500 total daily returns by weekdays for 2022 with only Wednesday still positive this year. Note that every day of the week this year has had more negative days than positive days. I have never seen a completely negative daily trend before and certainly not one that lasted more than 10 months of the year.

S&P 500 daily moves of +/- 2% for each year since the 2008 financial crisis. 2022 is poised to reach the highest levels since 2009 with 8 trading weeks remaining in the year. These daily totals do not include intraday moves as we saw on Friday with the Dow Jones moving over 1,300 points before closing with a gain of just 1.2%.

The main driver of volatility in the S&P 500 are stocks in the tech mega-cap FANG Index. The MicroSectors FANG+ Index 3X Leveraged ETN (FNGU) charts the 10 largest mega-cap stocks in the August negative channel reaching new 2022 lows through May 2020 levels this week on record negative volumes.

Apple Inc. (AAPL) is the main driver of the FANG mega-cap index. As discussed in many weekly articles, my videos and recent market positions, Apple continues to be a very good track record of where the markets are heading. The current price action follows the April-June breakdown pattern to the support at 130/share almost in a perfect repeat of the previous pattern as shown below.

FANG mega-cap monthly stock charts

The question to ask yourself when looking at these charts is whether any of the mega highs show that the “market bottom has been reached”. Meta Platforms, Inc. (META) fell to 2015 levels in the biggest selloff since its IPO and a loss of more than -73% of its market capitalization in 10 months.

Microsoft’s (MSFT) monthly chart is down -34% year-to-date, hitting 2022 lows again this week at the lowest levels since 2020. Strongest support is around 200/share on the monthly chart while the indicators remain in breakdown conditions.

Amazon’s (AMZN) monthly chart down -45.4% year-to-date hit new lows again this week at the lowest levels since 2020 in a technical breakdown below the 2015 positive channel .100/share had been key support, but the price accelerated lower on the missed third quarter results and lowered the outlook for the rest of the year towards 80/share next strong support.

The monthly Alphabet (GOOG) chart is holding up better than most -40% YTD, but only to 2021 levels and still above the 2021 positive channel. The 90/share support was the next strong support was last week, but now very likely to test 80 /share in the negative channel still looking for support.

The reaction to Wednesday’s Fed rate decision was the “worst last 90 minutes” of a Fed day in history.

Even though the Fed rose exactly as the market had expected, Chairman Powell’s indications to raise rates and continue the record QT balance sheet reduction prompted the biggest negative reaction on record in the past few hours.

You may recall this extreme boost on Wednesday as major equity indices rallied from the 75 basis point rate hike. This rally was quickly followed by reaction to Chairman Powell’s warning of further rate hikes to a higher terminal rate to rein in record inflation.

The Fed raised the funds rate to 4% to the highest level since 2008, continuing the fastest series of rate hikes in U.S. history and well above the 1980s trend line. Almost every investor is familiar with this pattern and what happened each time the Fed hit the 1980 trend line.

The fed funds rate follows a trend line from the 1980s that the Fed has never raised in over 40 years until 2022. Each peak prior to the trend line has led to a recession and a rapid policy reversal Fed rate hike. This year, the Fed is battling inflation levels not seen since the 1980s and Paul Volcker-style policy would see fund rates rise to earlier highs.

The bond market is going crazy

Direxion Daily 20+ Year Treasury Bear 3X Shares (TMV), also a measure of long-term bond yields, continued to soar this week. The highest BoJ QE intervention since 1998 gave us a strong rally in October credited with the best October gains for Dow stocks since 1976. This rally reverses as the Bank of England restarts policy again QT which was on hiatus for October benefiting the markets.

Treasury yields soar as 30-year bonds continue to hit new lows this week to return to 2011 lows. We’ve heard all year that the low was 160, then 140, then definitely at 130, down to 2014 levels, and now calls for a bottom may have taken longer after the last FOMC press conference.

Incredibly, the policies of global central banks to shrink their balance sheets in 2022 contributed to the worst year for US 10-year Treasuries since 1788. Markets under the Covid pandemic are having a very negative impact on bond values and sends Treasury yields to multi-year highs. The next logical step is that when this bond sell-off ends, we could see very large inflows into the bond market to capture these high yields and increase fund flows away from the lower dividend yields of the stock market.

September US Dollar Index Fund (UUP) intraday chart showing dollar volatility which now compares incredibly to the volatility of a small tech biotech stock. Central banks especially Japan have used more than $50 billion in intervention to try to prevent the yen from losing more than 33% of its value against the dollar over the past year.

chop at the top – Extreme volatility as global central banks struggle desperately against record dollar values.

Monthly chart of US dollar index funds putting the intraday chart above into context with the dollar at the highest levels in decades.

These dollar levels are unsustainable for global markets and central banks around the world are doing everything they can to prop up their own currencies and combat this sharp rise.

Conclusion

These are unprecedented times. These are the worst markets I can remember in over 30 years of active trading. Plus, it’s the worst economic combination of high inflation in 40 years, the largest QT reduction in the Fed’s balance sheet in US history, the fastest rate hikes of 0 % to 4% in US history and the highest US dollar levels in decades. The most common question I get asked is “What do you think will happen next?” and “How soon will this happen?”

Regular readers of my discussion forums have seen me post these two excellent documentaries several times this year in response to these crucial questions. First of all, I think The failure (2011) shows, the Fed did not learn from its mistakes in 2008 by creating the biggest bubble in market history.

Second, I think ex-Fed people shared some really great answers in the documentary. money for nothing (2013) on what happened in the 1980s and what they would have liked to have done to prevent inflation and avoid record bubbles in the markets.

These charts mirror many of my quantitative tightening warning articles this year. The excellent documentaries provide great context on where we might be headed in this environment of record Fed tightening. Ultimately, I hope this information is helpful to you as you navigate these tough markets and help you avoid a hard landing, even if the broader market may not.

All my wishes!

JD Henning, PhD, MBA, CFE, CAMS