Nasdaq: Chicken Little and the Cheshire Cat

• All three major US stock market indexes started 2022 off on a bearish note last week. 
• Much of the selling was attributed to a more hawkish US Federal Reserve attitude, with talking heads implying it was the Fed's job to make sure markets stayed bullish. 
• When Monday's closing bell rang, all three major markets had posted strong rallies off session lows with the Nasdaq finishing higher for the day. 

There was a great deal of hand wringing and gnashing of teeth over the course of Monday’s session for US stock indexes. The Big 3 (S&P 500, Dow, and Nasdaq) had closed lower the previous four days, with sellers getting more aggressive last week. The S&P ($INX)  had slipped 2.5% from Tuesday through Friday, the Dow ($DOWI) dropped 1.5 during that same time, and the Nasdaq ($NASX) had nosedived 6% from Monday’s close through Friday’s settlement. It was a rough week, leading television talking heads to bemoan the hawkish attitude of the US Federal Reserve in the minutes of its December meeting. Coverage escalated the blame by basically saying it was the Fed’s job to make sure investors feel good and stock markets remain bullish. My thought on this? Hogwash. The Fed’s job is to set monetary policy for the economy at larger, and unlike some past presidents’ belief, stock markets are not the economy. 

That’s where Monday got interesting as the major indexes started the day under pressure. The S&P initially lost 95 points (2.0%), the Dow fell 592 points (1.6%), and the Nasdaq dropped 406 points (2.7%). But just as all the pundits were running around squawking about how the sky was falling, the three major indexes rallied with the S&P finishing 6.74 points lower for the day, the Dow was down only 162.79 points, and the Nasdaq actually closed 6.93 points higher for the day. 

Maybe Monday was nothing more than a standard dead-cat bounce, when a bearish market simply runs out of sellers and bounces off its lows as a few buy orders come trickling in. I often think of Warren Buffett’s quote above it being wise for investors to be “fearful when other are greedy, and greedy when others are fearful” when markets make this kind of mood. And Mr. Buffett tends to walk away from these situations grinning like a Cheshire Cat. 

Though Mr. Buffett is not a fan of technical analysis, I find it interesting the Nasdaq posted a short-term bullish spike reversal on its daily chart Monday, an indicator its minor trend had turned up again. However, we need to remember spike reversals are not the most reliable of patterns and one occurring on a daily chart is even less so. Still, it was interesting to watch, and will certainly make for a fun round of early morning financial television analysis Tuesday.