The stock markets took it to the chin on Friday. The Dow was down 905 points, or 2.5%, the S&P 500 was down 106 points, or 2.3%, and the Nasdaq was the “best” performer, down 354 points, or 2.2%. The downdraft was propelled by the Omicron Covid-19 edition to headline, but falling stocks also hurt a short Friday trading session.
Note that Monday’s pre-market trading was showing the S&P 500 on Sunday evening and the Nasdaq was up nearly 1%.
Markets were in overbought position
The S&P 500 and Nasdaq’s relative strength index, or RSI, were both above 70 in early November and at 70 a week earlier. An RSI reading of 50 indicates that the stock or index is neutral or neither overbought or oversold. Below 30 show oversold and above 70 show overbought. The red circles at the top of the two charts below show when the indices were overbought and the middle part of the charts indicate where the indexes last traded.
The RSI for the S&P 500 and Nasdaq has now dropped to 44.44 and 45.49, respectively. While this does not mean that the market and therefore their RSI cannot decline further, it does help to indicate that some short-term foams are out of the market.
Another sign that the market had overtaken itself is where the indexes were trading in relation to their moving averages. These are shown in the graph by the blue line (50 day moving average), red line (100 day moving average) and green line (200 day moving average). Both the S&P 500 and Nasdaq had moved above their 50-day moving averages by the same amount of previous highs and failures.
Michael O’Rourke, chief market strategist at JonesTrading, wrote in a note on Sunday that, “In the Monday and Tuesday sessions before the Thanksgiving holiday, Businesshala’s S&P 500 posted a new all-time high of over 1,000 for each session. Monday’s high. It was the only episode of a new S&P 500 high and more than 1,000 new lows on US exchanges in a single day in nearly two decades of data compiled by Businesshala. It’s a sign that the market is widening. Not okay at all.
O’Rourke sums it up nicely in his note that “the market reaction was this”. “shoot first and ask questions later” And that, “one has to consider whether there was an equity market” “cooked” for such a step. ,
The Friday Before the Weekend with Shorter Hours and Fewer Investors
The market reaction on Friday was a classic “risk off” scenario, especially on Fridays. Investors in the face of potentially large unknown downsides and computerized trading models, Omicron in this example, would sell stocks and indices (which amplify the impact on the market) and wait until Monday to see if anything worse happens over the weekend.
It also didn’t help that the Friday after Thanksgiving was a short trading session when a large percentage of portfolio managers were on vacation. They were not in office to determine whether this was an opportunity to take profit or be concerned and sell. It shows with less than normal trading volume.
The VIX or Volatility Index is also known as the “Fear Index”, and tends to rise sharply when the market is down. It rose 10.04 points to 28.62 or 54% on Friday. As can be seen in the chart below, this is not an unusual phenomenon and is short-lived before a reversal occurs and the stock rises. However, past chart patterns do not guarantee the future.