Stock Market Decline May Not Be Over as Credit Spreads Begin to Widen

investing.com:

Stocks took a hit last week, with the S&P 500 plummeting by more than 3% and the Nasdaq 100 by almost 3.5%. The Russell 2000 fared even worse, dropping nearly 4%. While markets have declined, let’s face the reality: they could dip further. The S&P 500 is only 6% off its peak, and the Nasdaq 100 has decreased just 7.7%. This is relatively modest, considering that the Nasdaq is still up about 38% from its December lows, and the S&P 500 has climbed 23.5% from its October trough.

At this juncture, the S&P 500 has only retraced 23.6% of its entire gains. One might anticipate a retracement to 38.2%, which would pull the index down to 4,178, while a 61.8% retracement would bring it to 3,977. These are standard pullback levels in any Elliott wave and Fibonacci analysis. Given the massive move higher in interest rates, I’d be surprised if last week’s decline is the end of it. Could the index rebound in the next few days? Possibly. But I believe the downturn is far from over.

Not only that, but the dollar is now on the cusp of a major breakout after hitting resistance at 105.6. It seems clear that the dollar could continue strengthening against the yen, especially given the Bank of Japan’s inaction this past week and the rising inflation rates.

Meanwhile, the European Central Bank seems uncertain about its next steps, and the Bank of England should have raised rates last week but chose to back down. The US economy continues to perform better than much of the world, which suggests that the dollar should strengthen against the euro, pound, and yen.

If it weren’t for the People’s Bank of China consistently setting the daily fixing rate for the yuan at an absurdly low level, the dollar would gain against the yuan. However, the yuan’s