The charts say stocks could have much further to fall as investors price in the three-headed monster that is elevated inflation, rising interest rates from the Federal Reserve and a potential Ukraine-Russia war.
“Every facet of my work continues to suggest that this is a chart book consistent with a 20% drawdown in the S&P [500]. While ephemeral relief rallies will occur as the conflict ebbs and flows, the seeds of the current decline were planted by policy and the pandemic long before troops massed on the border, and I urge you to fight the temptation “buy when the cannons are firing” for anything more than a “trader’s bounce” whilst still staring down the ominous specter of the highest inflation in 40 years and more hikes than meetings to combat said inflation,” said veteran EvercoreISI technical analyst Rich Ross.
Ross’ work shows (see chart below) the S&P 500 being vulnerable to a move down to 3,600 if the major stock index drops below the key 4,200 level.
“While bounces will occur (see Europe) as bulls attempt to defend the neckline of the well-defined head and shoulders top, the sum of the charts across asset classes is simply too much to bear,” Ross added.
That 4,200 level on the S&P 500 could be tested shortly.
On Monday, Russian President Vladimir Putin ordered the deployment of Russian troops to two breakaway regions of Ukraine. The move — seen by the West as a provocation — came after Putin recognized their independence.
Countries wasted no time implementing fresh sanctions on Russia, providing a taste of what could happen economically should Putin invade Ukraine.
U.K. Prime Minister Boris Johnson unveiled a package of sanctions on Russia Tuesday morning. Germany halted the important Nord Stream 2 gas pipeline that sends Russian natural gas to Europe.
The U.S. unveiled a first tranche of sanctions on Russia Tuesday afternoon.
All three major stock indexes fell as traders assessed how the situation will impact energy markets and Fed policy.
The Dow Jones Industrial Average really took it on the chin, falling nearly 700 points by 2:00 p.m. ET. Only three Dow components were in the green (slightly): Amgen, Travelers and McDonald’s.
“We believe investors should be very careful about viewing the intermediate-term prospects for the stock market through the prism of geopolitics alone,” warned Miller Tabak chief markets strategist Matt Maley.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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