The rug pull season is here, said JC Parets, founder of All Star Charts in an 'X' post, predicting correction round the corner as market breadth has declined consistently through the year.
The rug pull season refers to a period when investors face sudden losses because of unforeseen events, with the latest culprit being the hotter-than-anticipated US inflation data.
The US stock market was rocked by a higher inflation print, which stoked concerns that the Federal Reserve might maintain higher interest rates for a longer duration. The Dow Jones experienced a decline of 1.3 percent, marking its worst performance since March 2023, while the S&P 500 and the NASDAQ Composite indices dropped by up to 1.8 percent.
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In January, the consumer price index inched up 0.3 percent on a monthly basis and by 3.1 percent on-year, surpassing Street estimates. These figures provide the Fed with justification to postpone interest rate cuts beyond the market's expectations, with traders adjusting their expectations for rate cuts to July from June.
Apart from the inflation data, historical seasonality for February is playing a role. "Seasonally, first quarter of election years is one the worst quarters of the entire four-year cycle. This time seems no different," said Parets in 'X' post.
He also pointed out accumulating divergences in equities. For instance, while the NASDAQ 100 index and the S&P 500 index had already risen by 5-6 percent in 2024, the 14-day RSI momentum indicated an 'overbought' market by trading above the 70 level.
The US bond market was sending warning signals as it traded above the 4-percent mark along with higher trend of equities. The US dollar index futures, too, was positive every single week in 2024, making it six weeks in a row, Parets said.
Given the hot inflation figures, the 10-year US treasury yield added 15 basis points (bps) overnight to 4.3 percent, while the yield on 2-year treasury note climbed by 19 bps to 4.6 percent.
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The change in narrative affected markets in Asia-Pacific as well this morning. Japan's Nikkei 225 retreated from 34-year highs, falling 0.7 percent, while South Korea's Kospi and Australia's S&P 200 indices declined over 1 percent each.
Back home, trends in the GIFT Nifty had paved way for a gap-down start for the benchmark Indian indices.
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While investors have seen majority of stocks going up in price, JC Parets warned that one is yet to see majority of stocks breaking to new lows. "When you see that, you will know things are getting a lot worse. And we will be right here talking about it. Because that’s just how we roll. Rug Pull Season is here," he warned.
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