U.S. stock benchmarks closed sharply lower Wednesday as Wall Street digested a grim near-term economic outlook from Federal Reserve Chairman Jerome Powell and as state and federal officials attempt to restart businesses from a coronavirus-induced lockdown.
“The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II,” Powell said.
How did major indexes fare?
The Dow Jones Industrial Average US:DJIA fell 516.67 points, or 2.2%, to end at 23,247.97, while the S&P 500 index US:SPX retreated 50.12 points, or 1.8%, ending at 2,820. The Nasdaq Composite Index US:COMP finished at 8,863.17, off 139.38 points, or 1.6%.
Hopes for a swift U.S. rebound from pandemic shocks collided with Powell’s “highly uncertain” near-term outlook for the economy on Wednesday, even as businesses across the nation work to reopen.
Powell said additional government aid to households and businesses may be “worth it” to keep lasting damage to the economy from developing, during a webcast discussion with the Peterson Institute for International Economics on Wednesday.
“Additional fiscal support could be costly but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” Powell said, but added it was ultimately up to Congress and the administration to consider this trade-off.
Technical Trader’s Corner
A number of textbook “bearish engulfing” reversal patterns have appeared in the stock charts of large-capitalization technology companies to suggest the momentum in the tech sector may have swung from bulls to bears.
There are other technical warning signals that warn investors to beware buying on a dip, at least in the short term.
For candlestick chart followers, a bearish engulfing is a two-day pattern that starts with a new closing high for a recent uptrend. The next day starts with a gap higher at the open to a new high, before an intraday reversal to close below the previous day’s open.
The patterns suggest a buying climax may have occurred that marks a reversal in trend.
On Tuesday, the index opened at 9,326.06, then rose to a 3-month intraday high of 9,354.45 before pulling a sharp U-turn to close down 2.0% at 9,112.45. Basically, Tuesday’s trading completely engulfed Monday’s trading range, in a bearish way.
And there are other technical indicators that suggest investors may consider pausing before committing new money to big tech.
For one, there is a bearish technical divergence pattern, in which the Nasdaq-100’s momentum indicator has been trending lower since mid-April even though prices kept going up. Basically prices are rising at a much slower pace the curve has turned lower-to suggest each gain is taking more and more out of the bulls.
On top of that, the Nasdaq-100 is starting to edge below an upward sloping trendline that has defined the rally off the March low. Sustaining a close below that line would be another warning of a change in the trend.
Keep in mind that these indicators are appearing in the daily charts, which means the signals are shorter-term in nature. But the more reversal signals that appear in the shorter-term charts, the more conviction technical analysts will have in their medium-term message.
Winning Market Sectors Rotating Soon?
Even as U.S. stocks have pulled back in recent days, many investors and analysts remained puzzled by just how vigorously the major indexes have rebounded since late March, even as the coronavirus epidemic has ground the U.S. economy to a halt.
But a close look at the composition of the S&P 500 index illustrates why the stock market has been remarkably resilient in the face of accumulating evidence of widespread economic dislocation, according to Ed Clissold, chief U.S. strategist at Ned Davis Research.
In a Wednesday note titled “Is the S&P 500 COVID-proof?” Clissold argued that “on a market-cap weighted basis, the S&P 500 is not as impacted by the economic dislocations caused by the pandemic as might be expected.”
As the attached chart shows, Clissold classified each S&P 500 constituent as a COVID-19 “winner,” “loser” or “neutral,” based on whether its operations have been meaningfully impacted in a positive or negative way, by the epidemic. Simply put, the largest stocks in the index have either not been impacted by the virus, or they have actually benefitted from it.
But the benefits of this dynamic may have already been fully captured by investors as the U.S. pivots toward easing economic restrictions and as the world moves closer to finding effective treatments for the deadly disease, Clissold argued.
“The analysis explains how the indices got here,” he wrote. “Moving forward, if the economy opens up, leadership should rotate” to other parts of the market including small-caps, cyclical value stocks, and those in the industrials, financials, materials and real-estate sectors.