LIVE MARKETS Baby and bath water both tossed

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BABY AND THE BATH WATER BOTH TOSSED (1605 EST/2105 GMT)

With rate jitters, fear-of-the-Fed, recession risks, Ukraine tensions read more , and Netflix’s disappointing earnings report all to contend with, U.S. stocks suffered one bad week.

Every major S&P 500 (.SPX) sector closed down for the week with consumer discretionary (.SPLRCD) hit hardest.

The Dow (.DJI), suffered its biggest weekly percentage decline since October 2020, while the SPX and Nasdaq Composite (.IXIC) had their biggest weekly slides since March 2020.

All three of the major indexes ended Friday below their 200-day moving average.

The small-cap Russell 2000 (.RUT), the NYSE FANG+TM index (.NYFANG), of which NFLX is a member, and the Philadelphia SE Semiconductor index (.SOX) also had their biggest weekly percentage declines since March 2020.

The DJI finished down 6.9% from its early-January record close, while the SPX ended off 8.3% from its early-January record close. The Nasdaq Composite ended down 14.3% from its November closing peak. The RUT finished off 18.6% from its November record close.

The FOMC meets next week on January 25-26.

Here is Friday’s closing snapshot:

(Terence Gabriel)

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INDIVIDUAL INVESTORS KEEP A WATCHFUL EYE ON INFLATION (1345 EDT/1845 GMT)

As part of the most recent American Association of Individual Investors (AAII) Sentiment Survey read more , AAII asked its members which factors are most influencing their six-month outlook for stocks. Many respondents listed multiple factors.

AAII reported that inflation topped the list as a key factor, with 29% of respondents citing it. About 20% mentioned interest rate hikes as another factor vital to their outlook.

About 15% of respondents listed both the coronavirus, including the omicron variant, and/or political challenges as considerations.

Meanwhile, about 9% of respondents noted economic concerns such as employment levels and the labor participation rate, while 7% of respondents said they will be paying attention to company earnings in 2022.

Monetary policy and the Federal Reserve were flagged by 7% of respondents. Roughly 4% of respondents mentioned supply chain issues.

Here are a couple of quotes from investors on the matter:

“The market is factoring in interest rate increases. Inflation is expected to stabilize and remain high, and we will learn to live with omicron.”

“Although strong jobs demand will create inflation, it will also provide a base for strong consumer demand. I expect inflation to be elevated due to labor and housing but to get a respite from goods inflation as supply chain pressures ease.”

(Terence Gabriel)

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AFTER NETFLIX’S BIG DISAPPOINTMENT, WHAT NEXT? (1310 EST/1810 GMT)

Investors may be bracing for more bad news on the earnings front after Netflix’s gloomy forecast late Thursday, with a number of market heavyweights due to report next week.

Netflix’s stock was down more than 21% on Friday and the Nasdaq (.IXIC) was down more than 1%, adding to recent market weakness and worries about the earnings season.

While it’s still early in the game, the reporting period so far appears weaker than in recent quarters. Just 76.6% of earnings reports are beating analysts’ expectations compared with a full-season average of 84% of companies beating estimates over the last four reporting periods, according to Refinitiv data.

The S&P 500 earnings growth forecast for the fourth quarter is up just slightly from a week ago. As of Friday, overall year-over-year profit growth for S&P 500 companies is expected to be 23.7% versus 23.1% a week ago, per Refinitiv data.

Microsoft (MSFT.O), Tesla (TSLA.O) and Apple (AAPL.O) are among companies due to report their results next week, as the earnings season overall goes into full gear.

That could have a big influence on stocks. “Right now the (investor) psychology is kind of leaning to the negative bias. It could change quickly. We’re entering the peak part of the earnings season,” Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, said Thursday.

“If some of the bigger companies, especially the big tech companies, really can report good numbers and outlooks, that could change the psychology very quickly.”

(Caroline Valetkevitch)

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FEW BULLS, LOTS OF BEARS! (1220 EST/1720 GMT)

The percentages of individual investors with a bullish outlook for the U.S. stock market fell to an 18-month low in the latest American Association of Individual Investors Sentiment Survey (AAII). With this, bearish sentiment jumped to a 16-month high.

AAII reported that bullish sentiment, or expectations that stock prices will rise over the next six months, fell by 3.9 percentage points to 21.0%. Optimism was last lower on July 29, 2020 (20.2%). This is the ninth consecutive week that bullish sentiment is below its historical average of 38.0%.

Bearish sentiment, or expectations that stock prices will fall over the next six months, surged by 8.4 percentage points to 46.7%, staying above the historical average of 30.5% for the ninth consecutive week. This is the highest level of pessimism since September 9, 2020 (48.5%).

Neutral sentiment, or expectations that stock prices will stay essentially unchanged over the next six months, decreased by 4.5 percentage points to 32.3%. This is the seventh consecutive week that neutral sentiment is above its historical average of 31.5%.

AAII noted that bullish sentiment is unusually low and bearish sentiment is unusually high. “Since July 1987, when the level of bullishness in the Sentiment Survey was more than one standard deviation below its historical average (currently readings below 28.0%), the S&P 500 index has realized six-month average and median gains of 8.2% and 8.0%, respectively.”

With these changes, the bull-bear spread fell to –25.8 from -13.4 last week read more . This is the most negative the spread has been since late-July, 2020 (–28.2):

(Terence Gabriel)

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TWO STEPS BACK: ECONOMIC RECOVERY STUMBLES BACKWARD INTO 2022 (1137 EST/1637 GMT)

The U.S. economy has taken a couple of steps backward as it foxtrots its way back to full recovery from the steepest, most abrupt recession in history.

Recovery trackers from economic analysis firm Oxford Economics (OE) and broker Goldman Sachs (GS), which use different groups of metrics to assess the status of the United States’ dance back to ‘normal,’ both reveal a backslide, with the health picture deteriorating at the hands of the Omicron COVID-variant and a hawkish pivot by the Fed identified as the culprits.

“Health conditions stood at their worst in 10 months, while demand weakened sharply,” writes Oren Klachkin, lead U.S. economist at OE, who said the Omicron/Fed double-whammy sent the OE Recovery Tracker to its lowest since last April.

“Financial conditions tightened, and mobility softened,” added Klachkin, who then offered reasons to be optimistic, saying “stronger employment and production data indicate that under the surface the recovery is maintaining positive momentum.”

The graphic below, courtesy of OE, shows a history of the recovery broken down by its six main metrics: financial, mobility, production, employment, demand, and health (click to enlarge):

As for GS, lead analyst Jan Hatzius said that while the spike in COVID-related hospitalizations are currently well above the two previous waves, Omicron is resulting in a smaller percentage of hospitalizations and deaths.

But sick workers made their absence felt.

“The share of the adult population not working because of virus-related reasons tripled” in the first month of the year, Hatzius writes, outpointing that public-facing workers in education and healthcare saw and average 10% absenteeism rate, and airline staff in mandatory isolation due to positive COVID test results caused “an average of 8% of flights were canceled each day between December 27 and January 7.”

Virus fears are influencing consumer behavior, according to GS, with 59% of adults viewing health risks from normal activities from “moderate” to “large,” a 15 percentage point gain since Omicron made its entrance.

Hatzius cites a marked decline in TSA throughput and Open Table’s measure of seated diners as evidence of declining activity in virus-sensitive services.

The coming week should offer even more clarity regarding the strength of current headwinds and the economy’s ability to withstand them.

The FOMC’s statement and Q&A session at the conclusion of its two-day monetary policy meeting will be the star of the show, with the Commerce Department’s first stab at fourth-quarter GDP, PCE inflation, consumer spending, and new home sales filling out the supporting cast.

(Stephen Culp)

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NASDAQ HEADS FOR BIGGEST WEEKLY FALL SINCE MARCH 2020 (0958 EST/1458 GMT)

Wall Street’s main indexes are continuing lower early Friday, and on track for at least their third-straight week of declines, after a weak forecast from Netflix sent shares of the streaming company and its peers spiraling down.

Indeed, it’s been an especially rough week for the Nasdaq (.IXIC). The tech-laden index is off more than 6%, putting it on pace for its biggest weekly percentage fall since a 12.6% collapse in March 2020. Under the surface, chips remain especially weak. The Philadelphia SE Semiconductor index (.SOX), with a more than 11% slide, is also on pace for its worst week since a 16% swoon in March 2020.

Meanwhile, despite a sharp downward reversal in the U.S. 10-Year Treasury yield , which has seen it slide from Wednesday’s high of 1.9020% back to the 1.75% area on Friday read more , growth (.IGX) is on track to underperform value (.IVX) on the day, and for the fourth-straight week. The IGX/IVX ratio is on pace for its biggest monthly drop since February 2001.

Here is where markets stand in early trade:

(Terence Gabriel)

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UKRAINE TENSIONS COULD FAVOR US ASSETS (931 EST/1431 GMT)

Tensions between Russia and Ukraine are grabbing the attention of investors, who are considering ways any turmoil will ripple through markets.

Strategists at BCA Research assign a 50/50 probability that diplomacy in the region will fail, leading to a “minor invasion” of Ukraine, as well as a 5% chance Russia invades the whole country. U.S. Secretary of State Antony Blinken said after talks with Russia’s foreign minister on Friday that Moscow would face a “swift, severe and a united response” if it invades Ukraine.

In a note on Friday, BCA strategists gamed out a scenario where Russian actions result in sanctions, with Russia retaliating in a way that aggravates Europe’s “energy crisis.”

“For investors, this means that US-Russia tensions pose a tactical threat to European risk assets,” BCA strategists wrote.

Historically, the strategists said, U.S. risk assets have outperformed foreign counterparts when global risk rises.

“The relatively more defensive nature of the US dollar and US equities implies that US stocks and the greenback will outperform in an environment of elevated risk,” the strategists said.

(Lewis Krauskopf)

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NASDAQ COMPOSITE: WILY COYOTE LOOKING MORE LIKE A BEAR (0900 EST/1400 GMT)

The Nasdaq Composite (.IXIC) ended Thursday down nearly 12% from its November-19 record close. And although its just the early days of 2022, the IXIC’s 9.5% decline so far puts it on track for its biggest yearly drop since 2008.

Of note, on a daily basis, the IXIC ended Thursday at its most oversold since the February/March 2020 panic read more :

Therefore, the Composite appears ripe for a bounce at any time. However, traders will be assessing the structure and character of any rally, since sudden strength could just prove to be a reaction to help alleviate the oversold condition, in what will still prove to be a continuing trend to the downside.

For example, in the August/December 2018, and February/March 2020 collapses, the deepest oversold readings on a daily basis occurred in the earlier stages of the declines. It was not until the IXIC hit new lows, accompanied by a bullish momentum convergence, that true bottoms were then found.

Meanwhile, a number of Nasdaq internal measures are especially weak again. The Nasdaq New High/New Low (NH/NL) index has fallen to 16.1% – click here: read more . The Nasdaq McClellan Summation (McSum) has plunged to -5,276 – click here: read more . The Nasdaq weekly Advance/Decline (A/D) ratio is at 0.79 read more . These measures have yet to stabilize, but have the potential to reach washed-out levels at any time.

That said, when looking at the Composite’s yearly Bollinger Band (BB) chart, the downside still appears to beckon. The IXIC still needs to fall to least 13,645 to tick back below the upper yearly band. Click here: read more

At that level, the Composite would be down 15% from its record-high close. And if its nine-year streak of yearly closes above the upper-yearly BB is to end, 2022 will likely see some venerable roadrunners, like tech (.SPLRCT), chips (.SOX), and FANGs (.NYFANG), prove to be road-kill.

(Terence Gabriel)

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Terence Gabriel is a Reuters market analyst. The views expressed are his own

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