Volatility Ahead: 5 Signs

A hotter-than-expected CPI number sent stocks careening lower for their worst losses in weeks Tuesday. The annual core CPI inflation rate of 3.9% came in unexpectedly high. Why does stubborn inflation matter for U.S. equities? U.S. Federal Reserve Chairman Jerome Powell and the Federal Reserve committee will likely keep interest rates “higher for longer” to tamp down stubborn inflation. According to the latest data from the CME FedWatch tool, a March cut (once nearly a lock) is out of the cards, and a May interest rate cut is highly unlikely.

The Nasdaq 100 Index ETF (QQQ) saw its worst losses since January 31st, as investors locked in gains in the high-flying and outperforming index. For context, the index is up more than 6%, even with today’s losses. Meanwhile, the Russell 2000 Index ETF (IWM), which is most sensitive to interest rates, was smoked by 4% for the session.

Below are five reasons a pullback in equities was due and why we may have some volatility over the next few weeks:

Seasonality Points to a Pause

Presidential seasonality trends have been and continue to be a fantastic roadmap for investors. Stocks tend to rally early, then correct in mid-February to mid-March during the typical run-up to a U.S. presidential election.

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Image Source: Carson Investment Research, FactSet

A More “Hawkish” Fed than Expected

Though the Fed is expected to cut interest rates multiple times later in the year, today’s CPI number increases the odds that the Fed Funds Rate will remain “higher for longer.”

Sentiment is Red Hot

The CNN Fear & Greed Index remains in “Greed” levels and was in “Extreme Greed” levels until Tuesday’s market rout. Over the past few years, a contrarian view of fading extremes has worked very well for investors. Meanwhile, the NAAIM Exposure Index, which represents the average exposure to U.S. Equity markets reported by the National Association of Active Investment Managers, remains stubbornly high at 93% exposure to the market. If active investment managers are almost fully invested, who’s left to buy in the short term?

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Image Source: NAAIM

Extreme Technical Readings Appear in Market Leaders

High-flying chipmaker Arm Holdings (ARM) was the talk of the stock market last week and doubled after reporting better-than-expected earnings and bullish commentary. However, ARM reached its 423.6% Fib extension, a level where stocks tend to hit resistance.

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Image Source: TradingView

ARM isn’t the only high-flyer flashing a yellow flag. Super Micro Computer (SMCI) is some 174% above its 200-day moving average. While such an extension does not necessarily mark an imminent top, stocks have a difficult time holding 200% or more above the 200-day historically.

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Image Source: TradingView

Though SMCI and ARM are just two cases, markets tend to follow leading stocks, and right now, no more prominent market leaders exist.


The McClellan Oscillator is a market breadth indicator designed to analyze the advancing and declining issues in the stock market. The faster moving average recently crossed below the slower moving average, signaling a bear cross. Historically, there are very few signals, but when there is one, they tend to be meaningful.

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Image Source: StockCharts.com

Also, Options Expiration is Friday. OPEX often leads to funky trading and market turning points as options traders’ re-position ahead of expiration on Friday evening.

Bottom Line

The bulls remain in control for now. However, five signals point to increased volatility ahead.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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