Stocks fell slightly today after geopolitical tensions got the trading session off to a rough start. House Speaker Nancy Pelosi is set to visit Taiwan tomorrow night, and in response, the Chinese People’s Liberation Army released a video claiming that they were “ready for war.” Meanwhile, the USS Ronald Reagan carrier strike group is planning to inch closer to Taiwan ahead of Pelosi’s arrival.
The market recovered through noon but ultimately retraced again as the major indexes closed lower. Without a doubt, the biggest underperforming sector was energy, which got dragged lower by falling oil prices.
But today’s small “slip” shouldn’t have come as much of a surprise following the rally of the last three trading sessions. July was the market’s best month dating back to November 2020.
Stocks were due for a cooldown period. And, outside of a few sectors, they didn’t really fall all that much. More losses could be on their way, however, as much of Wall Street is now anticipating a bear market continuation lower.
“While the bond market is starting to assume they get inflation under control, it may come with a heavier cost than normal, potentially a recession while they are still tightening, which may leave a very small window for stocks to work before earnings surprise on the downside,” said Michael Wilson, Morgan Stanley’s chief US equity strategist, in a note to clients.
“We think that window is now but it can shut quickly. Risk reward is poor after the recent rally so trade accordingly as time may be running out.”
Bank of America offered a similar take.
“Summer is a great time to go camping, but we aren’t out of the woods yet,” wrote the bank’s analysts.
“Our bull market signposts also indicate it’s premature to call a bottom.”
Per our observations last week, the S&P (as represented by the SPY) is still approaching resistance (yellow line) at the June highs. Even if resistance isn’t encountered, a reversal here would establish a lower high, setting a bearish formation.
The stochastic indicator is also showing that the market is overbought in the short-term, which is quite clear just by looking at the recent price action.
Conversely, EQT Corporation (NYSE: EQT) has already set a lower high (relative to the high of June) and is starting a short-term correction. The stock closed below its bullish trend (yellow trendline) last week and the 10-day moving average this afternoon.
The stochastic indicator suggests that EQT has plenty of room to fall, too. For those reasons, it might make sense to take EQT short with a trade trigger of $40.95, below today’s low, as the general market fights to eke out additional gains before slamming into resistance at the June highs.
