Weekend Stock Market Outlook – July 24 2022

Stock Market Outlook entering the Week of July 24th = Uptrend

    • ADX Directional Indicators: Uptrend
    • Price & Volume Action: Uptrend
    • Elliott Wave Analysis: Mixed

The stock market outlook flipped to an uptrend Wednesday, with two of three signals switching to bullish trends.  Don’t break out the champagne just yet.  So far this is a textbook, bear-market rally, even though the outlook changed.

Third time’s a charm for the S&P500 ($SPX), finally breaking above May resistance levels.  The S&P500 rose 2.6% for the week, taking out the downward sloping trendline and 50-day moving average for good measure.

Technical analysis of daily SPX prices

SPX Price & Volume Chart for the Week of July 24 2022

ADX directional indicators flipped the bullish trend, so this signal turns green.

Price/Volume shifts to bullish too, as the current rally attempt finally reclaimed the 50-day moving average with minimal distribution days.  Trading volume has also been below average on the upside, and so-called “leading” companies haven’t joined the rally, neither of which is ideal.

Technical analysis of daily IBD50 prices

2022-07-24 – Innovator IBD50 Fund

I use the Innovator IBD 50 Fund ($FFTY ) as a proxy for that category (innovative new products, accelerating sales and earnings growth, etc.), and you can see the poor performance relative to market averages.

The Elliott Wave signal remains mixed, with both a bullish and count in play. If mid-June marked the start of a bullish, 5-wave impulse pattern, then the SPX is in the third wave of an uptrend. Easy enough.

Technical analysis of daily SPX prices

SPX Elliott Wave Analysis for the Week of July 24 2022

The bearish count puts the index in the C-wave of a corrective, 3-3-5 “flat” pattern. The A-wave topped at 3946 and the B-wave bottomed at 3721, just a few points above the target range. Based on the typical percentages, a C-wave would end in the upper half of the target range (gold shading).

Coincidentally, the resistance level from from late May / early June is also near the top of the C-Wave’s target range. Watch for a negative divergence in the RSI to develop when the pattern completes, similar to the action at the top of the last bear-market rally.

Earnings season is upon us, and margins declining margins are showing the impact of labor, supply, and demand issues. Not to worry; where there’s a will, there’s a way, so you can still find very bullish talking points.  I read one article stating 2nd quarter results have been reasonably positive so far, because profit growth has exceeded expectations by ~4%!

“Better than expected” may seem like something to celebrate, but scope the year over year number.  A large portion of those same “results” show profits are down -14.5% from Q2 last year.  Beating expectations by 4% isn’t great if those expectations are down more than 10% year over year.  That’s decelerating growth, regardless of whether it’s above estimates.

Take Discover Financial Services ($DFS) for example.  The credit-card company posted Q2 revenue of $3.2 billion (higher vs Q1), with $1.1 billion in net income, and earnings per share of $3.96.  Since EPS estimates were $3.75 per share, commentators and headlines state that Discover beat estimates!  Hurray!  Buried in most articles are the year-over-year numbers, showing revenue down ~10% and net income down 35%! Yikes.

While we’re at it, make sure those earnings are “GAAP”, not “adjusted”.  Generally Accepted Accounting Principles are what make comparisons possible (i.e. apples to apples). “Adjusted” earnings are just that; earnings that management adjusts for “temporary” or 1-time events. You know, sort of like inflation being “transitory”?  If companies are only doing well on an “adjusted” basis, they’re not doing well.

AT&T ($T) also reported troubling results.  Not so much from an earnings standpoint, although those weren’t great, but from a consumer standpoint.  During the earnings call, their CFO said that customers were paying their bills more slowly than last year, and that in prior recessions this was common.  So much for that strong consumer…

In additional to more company results, the U.S. Fed will hike interest rates this week.  Do they raise 100 basis points, sighting the high CPI/PPI?  Or do they raise 0.75% because that’s what they said in June?  Do they communicate another hike in September, or “pause” to see how markets respond? You’re guess is as good as mine.

It’s also month end, with a weekly option expiration, which is usually good for at least 1 day of wild price action as firms rebalance & rehedge their books.

But most importantly, we’ll see Q2 GDP on Thursday.

Best To Your Week!

P.S. If you find this research helpful, please tell a friend.   If you don’t, tell an enemy.

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2 Responses to Weekend Stock Market Outlook – July 24 2022

  1. Rich Stein says:

    Hello J.Wenger –
    Been following your Elliott market letter for a couple of years now. I’m aware of what distribution days are but wondered what methodology you applied to arrive at your DD? Really enjoy the posting and hope to continue following your Elliott commentary as the mkts unfold.

    • J.Wenger says:

      Hi Rich,
      I use the following as a rule of thumb:
      – A distribution day occurs when the price drops >0.2% vs the prior close, with an increase in trading volume vs the prior session
      – For the total, I add up the number of distribution days over the past 25 trading days (~5 weeks)
      – If the days are clustered together, the selling is more indicative of a change in trend (i.e. 6 distribution days over 5 weeks isn’t as bearish as 6 distribution days over 2 weeks)

      Thanks for following!

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