bear looms over US markets
‘roller coaster ride’ barely even begins to describe the journey that the world has been through over the past couple of years, since the emergence of Covid-19. while the threat of the pandemic is yet to subside with new variants emerging at a higher frequency nowadays, another of the four horsemen of the apocalypse appears to be knocking at the door: war. after weeks of uncertainty over tensions in Ukraine the first shots have been fired. while there’s still a chance they may not lead to a larger conflict, they have certainly succeeded in claiming at least one major victim: the US equity markets.
on Feb 18, for the first time since April 2020 (when it first became clear that Covid-19 was a global threat), the Nasdaq made a “death cross” on the technical charts. what does that mean for investors?
the definition of a death cross in technical terms is when the 50-day moving average (50 DMA) price of a stock, index, or any asset drops below its 200 DMA. typically this signals a bearish shift in sentiment, i.e. the asset is seen as less valuable in the recent past for whatever reason than it was perceived to be over a longer term in the past. it is also typically considered the norm to trade ‘with the trend’ in the market, and thus one might now expect this downturn to continue for a while, regardless of happenings in Ukraine.
but on the flip side, if one looks at the previous 31 instances of the death cross for the Nasdaq since 1971, there’s plenty of reason for hope. In 22 of those 31 instances (71%), the index was higher after 21 days, and in 24 instances (77%) it was higher six months down the line. so in a way, the death cross perhaps also acts as a check to the market to consider whether its sentiment has become too negative. of course, a worsening situation in Ukraine might scupper such a comeback.
the added pressure of inflation and the impending interest rate hikes by the US Fed also play a part here. in such scenarios, people cash out of their relatively-risky investments (such as equity stocks) to meet their expenses and/or invest in more inflation-resistant assets (such as gold). even those with a sustained risk appetite might be cashing out of equities to invest in oil, as prices in the energy sector skyrocket due to potential implications of a war.
there still appears to be hope on the horizon as the US and Russia have agreed to a summit to discuss the situation. despite the death cross, the Nasdaq is only down 16% from its peak of November 19. however, a major portion of that slip has been over recent weeks, marking a sharp fall. given recent developments, it might be time for the casual investor to take a short break from the markets or possibly learn how to earn from ‘shorting’ stocks.