The Safe Investing Blog

Stock Market Outlook entering the Week of May 17th = Downtrend

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

COMMENTARY
The stock market outlook flipped to a downtrend last week with a change in the ADX signal.  Elliott Wave was already in a downtrend, but price/volume is still showing an uptrend in place.

2020-05-17-SPX Trendline Analysis-Daily

The S&P500 ($SPX) ran into some distribution to start the week, and then attempted to recover.  The ADX  directional indicators flipped, but the overall trend is VERY weak at the moment.  The downward trendline managed to survive another week, again just barely, with the SPX crossing the line during the week but unable to close above it.

2020-05-17-SPX Elliott Wave Analysis-Daily

For Elliott wave, the S&P500 is rangebound between the 50% and 61.8% level retracement levels, but may have started the minor C-subwave of the intermediate B-wave.  It’s hard to tell, given the price action on Thursday an Friday.  I expect the intermediate B-wave that to take us down to 2500-2600, but this market is doing anything but what is expected, so stay nimble!

Also, my labeling scheme was confusing some readers.  I tried to mirror the structure used for OEW, but realized that can be confusing if you haven’t studied OEW.  Since Tony’s blog isn’t being updated, I figured it’s time to just use traditional Elliott Wave labeling (e.g. Tony used “Major” waves, Elliott Wave doesn’t, etc.).

2020-05-17-SPX Trendline Analysis-Weekly

Let’s see…what happened last week:

• April data for retail sales and industrial production showed the steepest declines on record in the U.S. <– No surprise, given the lockdowns
• The U.S. experienced a bought of deflation in April, as measured by the Consumer Price Index (CPI) <– No surprise, given oil prices
• Tensions between the U.S. & China escalated with the U.S.’s move to block semiconductor shipments to Huawei <– A bit of a surprise, given the state of the economy

I joined the Strategic Investment Conference last week, hosted by Mauldin Economics this year.  I’ve wanted to attend for a long time, and the fact that it is virtual this year provided a great opportunity.  Unfortunately, I didn’t get to attend all of the presentations, so I’ll have to review the transcripts this week.  But the ones I did attend were excellent.

So even as the stock market is telling you that it is all figured out, I can assure you, what we face at this very moment is a highly uncertain economic future, and unfortunately, most of the longer-term risks are to the downside, not the upside. We are in a depression, not a recession. It’s a depression. I didn’t say the Great Depression; it’s a depression.”

“And I think the dynamics of a depression are different than they are in a recession, because depressions invoke a secular change in behavior. Classic business cycle recessions are forgotten about within a year after they end. At a minimum, depressions entail a prolonged period of weak economic growth, widespread excess capacity, deflationary pressure and a wave of bankruptcies.

– David Rosenberg

You can read a summary of Rosenberg’s presentation at Advisor Perspectives.  Ben Hunt’s discussion of political narratives and their use of models was thought provoking, and reflects my concerns with “single sourced” news.  The presentation concerned the narratives used for the COVID-19 crisis.  It’s been interesting to watch narratives change over the past few months, and how people flip-flop based on their needs. You can read a review of Hunt’s presentation at CMG Wealth.

Politics aside, reading between the lines is important for investors, because our decisions are based on all kinds of different models.  One tip/trick that I’ve used over the years:  skip over adverbs (always, never, fairly, unfairly) and adjectives (huge, tiny).  These words are relative; what’s fair for you may not be fair for me.  By removing them when you read a sentence, you boil the sentence down to the subject and verb; the heart of the message.  Then you can make your own judgement. Another tip/trick: don’t do this when you reading for fun or fiction; it makes for some very boring reading!

Best to your week!

Stock Market Outlook entering the Week of May 10th = Uptrend

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

COMMENTARY
The stock market outlook continues into the second week of May in an uptrend. The ADX and price/volume signals show an uptrend, while Elliott Wave indicates a downtrend.

2020-05-10 – SPX Trendline Analysis – Daily

The S&P500 ($SPX) spent last week recovering from the prior week’s sell-off. No real change in the ADX or price/volume story. The downward trendline also remains in place, just barely, with the SPX starting the week right on the line.

2020-05-10-SPX Elliott Wave Analysis-Daily

For Elliott wave, the S&P500 is challenging the 61.8% level retracement level again.

2020-05-10-SPX Elliott Wave Analysis-Daily-b-wave

Last week, we discussed the possibility of a flat or triangle creating a shallow price decline rather than a zigzag. If Monday’s low was really the end of a subwave, then odds decrease for the plotted zigzag price targets. I’ll leave them in for this week, and lets see what market prices have in store for us.

And here’s the weekly view, going back to the last recession, for some context.

2020-05-10-SPX Trendline Analysis-Weekly

The April jobs report came and went, showing 20.5 million jobs were lost. Investors reacted with a shrug, seeming to focus more on the fact that 80% of the job losses were reported as temporary layoffs. The disconnect between Main Street and Wall Street seems to grow each day, with job/income losses in stark contrast with rising stock prices and shareholder value. Not to mention the fact that we’re at the end of a long-term debt cycle.

That’s not a recipe for success…that’s a recipe for revolt! Hopefully, cooler heads and leaders prevail.

What remains to be seen is whether the job losses lead to prolong reductions in consumer spending. Shutting down businesses means we CAN’T spend, but opening them back up doesn’t mean that we WILL spend. In the U.S., consumer spending makes up 70% of the economy, and will determine the strength of the recovery. The stock market seems to be predicting a strong recovery, with the S&P sitting ~15% off its all time high already!

As always, let price be your guide and respond accordingly.

Best to your week!

Stock Market Outlook entering the Week of May 3rd = Uptrend

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

COMMENTARY
The stock market outlook starts May in an uptrend. The ADX and price/volume signals are bullish, while Elliott Wave indicates a downtrend.

2020-05-03 – SPX Trendline Analysis – Daily

The S&P500 ($SPX) looked ready to take on the 200-day moving average last week, but ran out of gas Friday.  Another day like that and we’ll see the ADX crossover and be back in a confirmed downtrend thanks to the Elliott Wave signal.  The good needs is that the overall ADX is still below 25, so any pullback should be really weak and/or short-lived.  Not a lot of institutional selling either.

The downward trendline I laid in last week was broken on Monday.  After the weak  price action Thursday and Friday, I think the resistance is still there, so I pivoted it to Wednesday’s high.

2020-05-03 – SPX Elliott Wave Analysis – Daily

For Elliott wave, the S&P500 pulled away from the 50% retracement level (~2792), only to run into resistance at the 61.8% level.

I made a few mistakes in my wave counts, which resulted in the wrong price targets and an incorrect signal.  Fortunately, the other two signals were correct and majority rules.  But it happens with Elliott Wave, particularly when new trends are getting started.

After some additional analysis, we just finished the a-subwave of the B-wave, and are now starting the b-subwave. Since the a-wave was 5 waves, we can expect the b-wave to be 3 waves. Typically, the b-wave of a zigzag retraces 50-79% of the a-Wave The a-wave started at 2191 and ended at 2955, for a total move of 764.

• 50% * 764 = 382
  • 2955 – 382 = 2573
• 61.8%* 764 = 472
  • 2955 – 472 = 2483
• 79% * 764 = 604
  • 2955 – 604 = 2351

2020-05-03 – SPX Elliott Wave Analysis – Daily – b-wave

So the targets for completion of the b-wave are between 2573 and 2351.  If the b-wave pattern is a flat or a triangle (not drawn), I’d expect the downtrend to be shallower; may not even get to the 50% level.

Reopening the economy was on everyone’s mind last week; will they, won’t they, and if so, how much.  In the mean time, the stock market continues higher, with the S&P500 having it’s best month since 1987.  Billions of dollars of stimulus doesn’t hurt…for now.  When that bill comes due, it may be a different story.

The Fed didn’t change rates last week, and committed to keep them near zero until employment recovers and we see some inflation.

More companies stopped providing full year guidance.  More companies cut their dividends; Royal Dutch Shell for the first time since World War II!  Something for income investors to consider if they’re salivating over yields in the oil and gas industry.

As discussed companies with strong balance sheets and high demand for their products in a “stay at home” economy are doing well, relatively speaking of course.

Some balance sheet metrics to look for include:

• Debt to Equity Ratio < 1.0 – New assets can be purchased with equity (vs. debt)
• Cash to Debt Ratio > 1.5 – Cash from operations can cover debts
• Quick Ratio > 1.0 – Assets (w/o inventory) are larger than debts
• Current Ratio > 1.0 – Current assets are larger than current liabilities

Best to your week!

I was studying some retracements and price targets today, and came across an issue with the Elliott Wave analysis I posted the over the past few weeks for the S&P500 ($SPX).

I’ve been labeling the recent downtrend as an A-wave with 3 subwaves (a,b,c).

This was incorrect, and is sort of a mish-mash of bullish and bearish waves and labeling.

A completed zigzag pattern has 3 waves (A,B,C).  A-wave’s have 5 subwaves (1,2,3,4,5).   B-wave’s have 3 subwaves (a,b,c).

If there were only 3 waves, then the recent downtrend completed all three waves (ABC), and the March low is the end of the C-Wave. This also means that we’re on the left side of the graph, we’re somewhere in the first wave of a new uptrend, on our way to new highs.

If the recent downtrend was an A-Wave of a broader correction, then there must be 5 subwaves (1,2,3,4,5). This also means we’re still on the right side of the graph, we’re somewhere in the B-wave, on our way to a near-term high before heading to new lows.

The reason for my error is two-fold:  I’m still learning Elliott Wave (I don’t know what I don’t know) and most of the counts I referenced still put us in a larger bull market, so they labeled the entire downtrend ABC.

So now what?  In both cases, bull or bear, we’re looking for 5 waves up from the March low.

I’m still in the bear market camp, so I relabeled the recent downtrend as an A-wave, with 5 subwaves (i,ii,iii,iv,v), as well as the first 4 subwaves ((1),(2),(3),(4)) in the current uptrend.

And now that the waves and counts are fixed, we can see that we haven’t completed the a-wave of the large B-wave counterrally.

Which also means that the price targets I’ve mentioned for the past few weeks are wrong, since they were all based on the a & b waves being complete.

So now need to go back a step for potential targets.

I’ve been showing the overall retracement levels of the entire downtrend (A-Wave), and those are still valid.

Typical retracements for a B-Wave are 50-79% of the A-Wave.

The A-Wave started at 3393 and ended at 2191 for a total move of 1202 points.

• 50% = 601 = 2792
• 79% = 949.5 = 3140

These changes also mean that the Elliott Wave signal is in an uptrend, and has been since market open on April 7.  That’s the same day the ADX switched over, so no changes in when the market outlook switched from a downtrend to an uptrend…we just would have seen all three signals green on the 7th, rather than just 2 of 3.

Best to Your Week!