Stocks jumped at the open this morning before enduring a massive intraday plunge. The Dow, S&P, and Nasdaq Composite all sunk into the close as their losses only intensified throughout the session.
Equities moved opposite the 10-year Treasury yield, which climbed above 4.00%. Any sustained move above 4.00% has been identified by many analysts (myself included) as a huge bear signal.
Prior to the morning collapse, however, sentiment was sharply bullish in response to news that UK PM Liz Truss had officially sacked finance minister Kwasi Kwarteng.
Kwarteng was responsible for the disastrous British mini-budget that crushed the pound late last month. That then sparked a UK government bond crash, which forced the Bank of England to reboot QE to save thousands of British pension funds from imploding.
Kwarteng was only finance minister for 38 days, making his time in office the shortest among post-war chancellors who did not die while holding the position.
Truss then delivered remarks saying she would reverse Kwarteng’s tax cuts as well as his poorly received spending plan. The PM added other ministers could be let go, too.
This cratered UK yields, leading to a temporary equity rally in the US. But analysts were quick to identify that the Kwarteng firing was a double-edged sword.
“Just to get this clear, never in history has there been so much instability and churn in the First Lord and Second Lord of the Treasury. That’s 301 years by the way… that’s one figure that doesn’t need checking by the OBR,” tweeted University of Buckingham former Vice-Chancellor Sir Anthony Seldon.
Former foreign and health secretary Jeremy Hunt was made the UK’s new finance minister.
And though bulls celebrated the news, bears took back control early on in the session.
UBS’s Mark Haefele explained why in a morning note:
“With core CPI still moving in the wrong direction and the labor market strong, the conditions are not in place for a Fed policy pivot, which would be one of the conditions for a sustained rally in the equity market,” Haefele wrote.
“Moreover, as inflation remains elevated for longer and the Fed hikes further, the risk increases that the cumulative effect of policy tightening pushes the US economy into recession, undermining the outlook for corporate earnings.”
That’s led to significant uncertainty moving forward, which JPMorgan trader Ron Adler articulated in a note last night.
“Long story short – no one knows what to do right now. Not. A. Single. Person. Reconciling the economy, positioning, liquidity, global macro crosswinds and the impact on the world’s ~500 largest companies has never been easy, but it feels downright impossible right now. But when everything is negative, it’s very easy to be bearish in sentiment but it’s very hard to manage such positioning,” Adler wrote.
That’s mostly been true over the last few weeks, but when a stock like EOG Resources (NYSE: EOG) is giving you a triple top, it’s hard to ignore.
The stock also closed below its 10-day moving average today, and the stochastic indicator suggests it has plenty of room to fall.
For those reasons, it might make sense to take a bearish trade on EOG should it fall below today’s low to a price of $119.25 as the general market looks to regain some semblance of stability next week.