A 90% Selling Day: Could the hawkish Fed and earnings season finally achieve capitulation?

Ed Mertiri |

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We highlighted the sharp concentration of losses in growth style sectors versus value the previous week, but last week broke that trend. Thursday and Friday of last week had value losing only slightly less than growth. Friday might be called a “capitulation” day, where over 90% of companies in an index were down. Even the darling Energy sector closed down -2.4%, only slightly below the -2.8% decline for the S&P 500 index.

The broad equity markets look to be setting a trading range, or consolidation pattern. The top of the range was tested multiple times in February and March but the bottom and support remains to be set. We still warn of volatility and a potential testing of lows in the next two weeks. Major stock earnings reports plus the May 3-4 Federal Reserve meeting will most likely keep investors in cash on the sidelines.

Last week’s decline is attributed to Federal Reserve comments confirming a 50 basis point increase at the May meeting, combined with several unexpected disappointing earnings reports.

Bond prices sold off for most of the week, with a stabilization on Friday. The 10-year Treasury note yield is coming closer to breaking 3%. Selling occurred across fixed income and equities for the week, increasing cash waiting to be invested in a highly inflationary period. We remain cautious for the remainder of the Q1 earnings season.

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