The stock market fell last week, with the S&P 500 (SPX) down 119 points to 2767, a decline of 4%.
• The sharp pullback was due in part to concern over rising interest rates and the trade war with China.
• Our projection this week is for stocks to continue this decline with a target of 2690-2710.
The stock market had its worst week since March of this year, as early selling turned into a panic on Wednesday and Thursday, as I discussed on the latest Market Week show.
This produced a spike in the CBOE Volatility Index (VIX) to near 29, before pulling back to 21 after Friday’s stock market rebound, which was driven by bargain hunters.
In the midst of this sell-off, Treasury Secretary Steven Mnuchin expressed confidence, saying, “The fundamentals are still strong, the US economy is strong, US earnings are strong, and so I see this as a natural correction after the markets are up a lot.”
Yet President Trump pointed his finger, “The Fed is going wild. I mean, I don’t know what their problem is that they are raising interest rates and it’s ridiculous.” He later expressed that he felt the Fed was “going loco”.
On Wednesday, the $23 billion auction for 10-year treasury notes produced the highest yields in 7 years. With an average yield of 3.225%, some observers expressed concern about low demand.
This of course rekindled speculation that China could sell a portion of the $1 trillion it holds in US treasuries. To which Mnuchin responded that, “If they decide they don’t want to hold them, there are other buyers, and obviously that would be costly for them to do.
On Thursday, the Chinese government reported a September trade surplus with the US of $34 billion. This record surplus occurred in the midst of heated trade negotiations between the two nations.
Once again, Mnuchin noted that this was the result of last minute orders for goods before new trade policies took effect. Other analysts concurred but noted that the spike could continue into January.
Our analysis is for stocks to continue to decline, with wide swings swings that have a downward bias. Our target is for the SPX to fall below last week’s intraday low of 2710 to as low as 2690. This represents potential downside of around 3%, which we feel is realistic. This move will continue into late next week, then recovering as a next minor cycle begins.
