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The Pain Arrives

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Equity markets had a rough week, delivering a wake-up call to investors. The pullback resulted in the worst weekly rout since March. It serves as a stark reminder of the vulnerability of the market, reminiscent of the time when several regional banks failed earlier this year.

The performance was broad-based, with the Nasdaq falling 3.6% and the small-cap Russell 2000 experiencing similar losses. The S&P 500 also took a hit, declining nearly 3% over the week despite Cisco Systems’ $28 billion acquisition of Splunk. All 11 S&P 500 sectors posted losses, with the Consumer Discretionary sector taking the hardest hit, down 6.3% on the week.

The decline in consumer spending continues to be a concern, as confirmed by market action this week. As we head into the fourth quarter, it is likely that consumer spending will finally crack. Data from Goldman Sachs indicates that credit card losses have reached their highest rate since the Great Financial Recession, and further increases are expected in the coming years. This concerning trend aligns with the recent surge in credit card debt, which has surpassed $1 trillion for the first time.

While the Federal Reserve chose not to raise interest rates, their commentary indicates that interest rates will remain higher for an extended period. This aligns with the narrative of an ongoing interest rate hike, which has been highlighted in previous articles.

The 10-Year Treasury yields ended the week at their highest level since 2007, causing mortgage rates to reach a 22-year high. As a result, housing affordability has hit an all-time low, impacting the home builder stocks.

On the economic front, the monthly Leading Economic Indicators fell for the 17th consecutive month, a trend not seen since 2007/2008. Additionally, another large office property defaulted on its loans, further indicating the potential risks in the commercial real estate market.

The S&P 500 is currently at a critical technical level, and a failure to hold here could lead to a retest of its 200-day moving average. Sporadic rallies might occur throughout the year, but the overall direction of equities is likely to be downward as the country faces the possibility of either a recession or stagflation.

Given these circumstances, a conservative investment strategy is advised. A diversified portfolio should include short-term treasuries for stability, conservative covered call holdings, and some bear put spreads to capitalize on market downturns.

As we approach the end of 2023, it appears that more pain may lie ahead for investors as the third quarter comes to a close. It is essential to be cautious and remain vigilant in these uncertain times.

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