Overview

For this article, we analyzed how the stock market did on February 21st, 2023. Weak retail sales and rising interest rates led to a sharp drop in the market. The S&P 500 Renko chart and underlying market conditions were then evaluated. In conclusion, it provided ideas for the next steps to take with the investing portfolio.

Update, March 4, 2023: What Happened in the Markets Since February 21?

The stock market panicked as a result of the gloomy retail sales predictions made by Walmart and Home Depot. Next, it was taken aback by inflation figures that showed the rate of price decline had stalled. Meanwhile, another upbeat jobs report has brought attention to the robust state of the labor market. All of this points to the fact that the Federal Reserve’s fight against inflation is far from over.

The stock market plummeted from its previous highs after a series of negative economic data. Even when the market has been falling since February 21, 2023, the SP 500 index has not dropped below 3,900. Since the rising trendline on the Renko chart passes through that point, this is significant. If the market price drops below the 3,900 level, it will not be a good sign.

Thursday and Friday’s recovery injected the market with renewed optimism and confidence. The 4,000 mark on the S&P 500 index is becoming increasingly important going forward. The market will remain tense as long as no one can predict how high interest rates will rise. Will lower corporate profits be a consequence of rising interest rates, which in turn lead to a recession in the United States? That is yet to be determined.

Why Did the Market Drop Sharply Yesterday, February 21st, 2023?

Yesterday’s (February 21st, 2023) trading session began on a bearish note and never recovered, going on to close even lower. The S&P 500 fell 2% Tuesday during the severe sell-off, falling below the 4,000 mark. Almost 700 points were lost on the Dow. In addition, the Nasdaq index lost 2.5% of its value. Investors’ attempts to prepare for sustained higher interest rates led to this carnage. The news of Walmart’s (WMT) and Home Depot’s (HD) weaker-than-expected retail sales served as the catalyst.

Which Fundamentals Are Having an Impact on the Market?

Inflation and interest rates, two major market drivers that dragged on stock prices all through 2022, continue to worry market participants. The Federal Reserve may continue to hike interest rates through 2023, according to underlying inflation data. Combining data on GDP and employment shows that the American economy is robust.

Even though the markets have responded well to reduced inflation, the Fed will keep tightening because of how well the job market is doing. The market is concerned about how much the economy will slow in the second half of 2023 as a result of the Fed’s tightening. Ultimately, share values will fall if analysts reduce their projections for future earnings. This is further supported by yesterday’s dismal retail sales reports from Walmart (WMT) and Home Depot (HD). High costs of living continue to put a strain on consumers. It’s possible they’ll have to cut back on discretionary spending and cover their basic needs with cash.

Renko Chart Pattern Analysis

Below is a Renko chart of the S&P 500 over a 2-year time period, with a fixed brick size of 6. After hitting an all-time high of 4,800 in January of 2022, it progressively declined until it hit a low of 3,500 in October of that same year. The upward trend of the correction that started in October 2022 is still going strong. A rising magenta trendline shows that the uptrend was not disrupted by the steep drop seen yesterday. As long as the price remains higher than 3,900, the current drop can be seen as a healthy pullback. In order to generate accurate buy/sell signals and make educated decisions, an effective Renko trading strategy would often include support and resistance zones, trendlines, and various Renko chart patterns.

What Should I Do With This Volatile Market Going Forward?

Cash

One can take a more defensive stance in the investment market if they fear a recession or slowdown in the US economy in 2023. Reducing stock holdings and increasing cash reserves on the side may be sensible. There are high-yield savings accounts available at FDIC-insured institutions that pay 4% interest.

Defensive Stocks and Dividend Stocks

Also, some parts of the market that have steady and predictable earnings are somewhat protected from market downturns. Defensive market sectors include utilities, consumer staples, and healthcare. Dividends from many of these companies represent yet another steady stream of passive income. As a result, dividend stocks are often good investments during volatile market periods. This is due to the fact that their stock values are more stable than those of the tech sector or growth stocks.

Covered Calls

Another effective strategy is selling covered calls on stocks you already own. You can use the call option premium you receive as a passive income stream. Also, it can act as a safety net to cushion the blow of any significant drops in share price and keep capital losses to a minimum. Covered call selling during a market decline might be rewarding once the market turns. The reason for this is that the premium you received lowers the overall cost of the stock. Your investment will immediately begin to generate a profit once market conditions have improved.