The Safe Investing Blog

Stock Market Outlook entering the Week of May 8th = Downtrend

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

ANALYSIS
The stock market outlook remains in a downtrend, with many investors experiencing bear market volatility for the first time.

From open to close, the S&P500 ($SPX) only fell 0.2% last week.  But that number fails to capture the volatility most investors felt, as the index rose 6% from Monday’s low to Wednesday’s high and then dropped almost the same amount from Thursday’s open to Friday’s session low.

SPX Price & Volume Chart for the Week of May 08 2022

The ADX remains bearish, as does price/volume.

The price/volume signal remains bearish.  Last week saw elevated trading volumes across the board, but the new low on Friday eliminated any possibility of a new rally.

SPX Elliott Wave Analysis for the Week of May 08 2022

Elliott Wave shows the SPX in a corrective wave pattern.  The RSI’s positive divergence continues (good), but there isn’t a confirmation from the MACD (bad). The past two weeks have a lot of volatility, so checking the counts on different time scales (e.g. weekly) is a good idea going forward.

COMMENTARY
The Fed raised rates 0.50%, as expected. At the press conference, Powell stated that 0.75% rate hikes were off the table, and stocks skyrocketed.

The question of a 0.75% rate hike seemed suspect from the beginning, since the Fed continues to provide early warnings for all moves to avoid surprises. And a 0.75% hike would have been a nasty surprise.

Then a big rally in response to squashing a rumor?  Also suspect.  Seems more like market makers and instantiations moving their hedges around, rather than a market bottom or economic data.  Sure enough, Thursday saw a massive sell-off, as whatever trade was “on” ahead of the announcement ran its course.

Regardless, this is the first bear market for many investors; basically anyone who started investing after the “Great Recession” ended.  Picking stocks is hard enough when volatility is low (i.e. VIX < 20), like it was for most of the past decade.  When volatility is high (i.e. VIX > 30), forget about it.  At those levels, it’s best to be in cash and or on the sidelines.

I don’t know when the market will turn around.  One metric I’m keeping an eye on is unemployment.  Since the Fed’s “dual mandate” is inflation and unemployment, and inflation is really high, you could assume that the Fed will continue to raise rates until either inflation comes down or unemployment goes up.

As rates rise, stock markets correct because earnings are squeezed.  When earnings are squeezed, companies cut costs (i.e. headcount).

Since there’s a high probability that unemployment will go up before inflation is reigned in, I’m watching that number (among others) as a sign that the tightening cycle has ended or at least been paused.

Happy Mother’s Day and Best To Your Week!

P.S. Be on the lookout for April inflation (CPI) numbers being released on Wednesday.

Invest Safely, LLC is an independent investment research and online financial media company.  Use of Invest Safely, LLC and any other products available through invest-safely.com are subject to our Terms of Service and Privacy Policy. Not a recommendation to buy or sell any security.

Stock Market Outlook entering the Week of May 1st = Downtrend

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

ANALYSIS
The stock market outlook shows a downtrend firmly in place for the first week of May. With the Fed set to hike interest rates this week, will it be the year of “sell in May and go away”?

The S&P500 ($SPX) dropped a little more than 3% last week.  The ADX shows a strengthening trend, and the directional indicators are bearish.

SPX Price & Volume Chart for the Week of May 01 2022

The price/volume signal remains bearish.  Last week saw elevated trading volumes across the board, but the new low on Friday eliminated any possibility of a new rally.

SPX Elliott Wave Analysis for the Week of May 01 2022

Elliott Wave shows the SPX in a corrective wave pattern.  A positive divergence developed in the RSI on Friday, but there’s more downside risk than upside potential at this point.

COMMENTARY
As expected, the stock markets experienced a lot of volatility. Perhaps “a lot” is an understatement, considering the Volatility Index ($VIX) spent most of the week around 30.

More than 30% of the S&P500 has reported Q1 results so far, including mega-cap names like Google (Alphabet), Amazon, Apple, Facebook (Meta) and Microsoft.  Out of that group, only Facebook was able to survive their earnings release without a big sell-off.  That’s probably because the stock already had a massive sell-off in February.

The initial GDP estimate for Q1 didn’t get as much airtime as earnings, inflation, the Fed, or “Markets in Turmoil”, but it should have.  The figure came in at -1.4%:  yes…negative, as in a contraction! The expectation was growth of 1.1% verses last quarter. The year over year comparison looks even worse, considering Q1 2021 GDP grew more than 6%! I don’t care how you slice that data, it’s bad.

This week, we get another Fed meeting.  A rate hike of 0.5% is the most likely scenario at the moment.  We’ll have to see what they say about the pace of balance sheet adjustments.

Speaking of the Fed, after seeing Q1 inflation data, we know that the “transitory” label was wrong.  Now the U.S. Fed will try “catch-up” via interest rate policy and stopping bond purchases. Their plan is that higher interest rates will create financial conditions that slow down demand for goods and services, which reduces the rate of price increases, which reduces inflation readings.

Right now, the market expects that catch-up plan to include ~10 quarter-point hikes, on top of the quantitative tightening. An economy growing at ~6%, like last year (Q1 2021 GDP), could handle it. But an economy that’s already contracting? Not so much.  Many people think something will break long before than happens, and force the Fed to reverse course and cut rates again.

Remember, inflation and GDP are the two data points that you need to get right when looking for places to invest your hard earned capital.  In Q1, we had stagflation: slowing growth with rising inflation.  If inflation slows, were in for slowing growth and inflation or “disinflation”.  Historically, stocks get crushed when GDP growth and inflation are slowing down at the same time.

Hopefully you used the bear market bounce in late March to book profits and rearrange your portfolio. Or at least shifting some things around in early April.  With the Fed on a mission to squash inflation, it will be a challenging summer for investors.  One more quarter of slowing GDP and we have a recession on our hands.

Best To Your Week!

Invest Safely, LLC is an independent investment research and online financial media company.  Use of Invest Safely, LLC and any other products available through invest-safely.com are subject to our Terms of Service and Privacy Policy. Not a recommendation to buy or sell any security.

Stock Market Outlook entering the Week of April 24th = Downtrend

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

ANALYSIS
As you might have guessed, the stock market outlook shifted back to a downtrend on Thursday last week.

The S&P500 ($SPX) dropped 2.7%…that’s just short of 5% in the past two weeks. The index started off well, rallying from support at the 50-day moving average to 200-day. From there, the index fell back to the 50-day on higher volume and then kept falling into the close on Friday.

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

The ADX is still below 20, so the trend is weak, but the directional indicators are bearish.

The price/volume signal shows a downtrend in place. Institutional investors sold after late-March rally, evidenced by many distributions days during the past 5 weeks. Thursday’s session ticked the box mentioned last week, in terms of distribution days and price action needed to shift the signal.

SPX Elliott Wave Analysis for the Week of April 24 2022

Elliott Wave confirmed the downtrend as well, although the Minor 2 was shorter than expected. Overall, Primary 2 is acting like zigzag corrective wave (5 waves down, 3 waves up, 5 waves down). We’ll have to see what price action is like this week, but the current Minor 3 kicked off with a lot of volatility, just like the past Minor 3 in mid-January.

COMMENTARY
The Fed continues to talk about its inflation fight, and Powell confirmed a 0.5% rate hike is on the table for May.  Based on the last announcement, he’s probably telling everyone that the Fed will hike rates 0.5%, without actually saying it.

There is a growing expectation that the Fed will hike rates until “something breaks”, and the 2022 Fed Funds Futures is pricing in 10 rate hikes.  I expect something to break before we get there, but stranger things have happened.

As you can see above, this week is jam packed with the earnings releases of companies that are widely held by all sorts of investors.  There are several names from the Dividend Aristocrats and Dividend Kings lists, as well as 4 of the 5 largest components of the S&P reporting:

• Apple = ~7% of the index’s total value
• Microsoft = ~6%
• Alphabet = ~4% (Class A + Class C Shares)
• Amazon = ~4%

If last week was any indication, we’re in for a lot of volatility this week.  Weak earnings are one thing, but lowering guidance or mentioning headwinds and slow downs will cause investors to press the sell button;  HCA Healthcare ($HCA) and Verizon ($VZ) come to mind.

If you’re looking for shelter from the inflation storm, energy, utilities, and consumer staples will probably be the “least bad”, while technology and consumer discretionary get hurt the most.

Several readers emailed me last week, commenting that their signaling process had already shifted to a downtrend and/or bearish outlook.  I think that’s fantastic! One, because they made some moves that saved them from losing money. And two, because they created a process and executed it!

This stock market outlook is just an example of how to evaluate market conditions, as well as how to make improvements over time.  It’s better than nothing, but use it as a tool to get you started.  Every investor has a different situation and different needs, so every investor needs their own process with their own signal(s) for the things they are trading.

Best To Your Week!

Invest Safely, LLC is an independent investment research and online financial media company.  Use of Invest Safely, LLC and any other products available through invest-safely.com are subject to our Terms of Service and Privacy Policy. Not a recommendation to buy or sell any security.

Stock Market Outlook entering the Week of April 17th = Uptrend

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

ANALYSIS
The stock market outlook remains unchanged from last week; an uptrend while we wait for confirmation of a change. Short update this week, on account of the Easter Holiday.

The S&P500 ($SPX) fell 2.1% for the week, unable to break free from the pull of the 50-day moving average.

SPX Price & Volume Chart for the Week of April 17 2022

The ADX remains continues to signal a downtrend with the directional indicators growing more bearish over the week.

The price/volume signal shifts from an uptrend to mixed. SPX dropped below the 50-day moving average, and also closed below the April 18 follow-through day.  Distribution days are also piling up (5), so a down day this week on elevated volume would put this signal into a downtrend, as well as the overall outlook.

SPX Elliott Wave Analysis for the Week of April 17 2022

For Elliott Wave, the count remains mixed.  The bounce back to 4650 didn’t happen.  Instead, the SPX added a 5th wave down, and appears to have completed an impulse wave (rather than a corrective wave).  Which means the March 29th high was the likely end of our bear market rally.  If so, Minor Wave 2 should now take the market back towards 4650.

COMMENTARY
We got Consumer Price Index (CPI) data last week, and it showed that inflation remains high (duh).

#Inflation Numbers (Consumer Price Index)
CPI Headline +1.2% M/M
CPI Headline +8.54% Y/Y (highest since Dec. 1981)
—
CPI Core +0.3% M/M
CPI Core +6.5% Y/Y (lower than expected)
—
Energy +48.3% Y/Y (!)
Food +10% Y/Y)
Medical +2.9% Y/Y
Shelter +5% Y/Y

— Invest Safely (@investsafely) April 12, 2022

Not to be outdone, the Producer Price Index numbers (PPI) came in at an all time high: 11.2% year-over-year!  Those increases haven’t hit consumers yet.

The “good” news, if you can call it that, is inflation has probably peaked unless there’s a massive shock. For y-o-y figures to continue rising, the price of oil needs to reach 180+.  If that happens, we’ll have things other than inflation to worry about.

Q1 earnings continue this week, with Bank of America, Tesla, and Netflix reporting.

#earnings for the week https://t.co/lObOE0dgsr $TSLA $BAC $NFLX $HAL $SCHW $CLF $JNJ $AAL $SNAP $BK $T $LMT $NUE $PG $AA $IBM $VZ $ASML $UAL $JBHT $SYF $SIFY $SI $FCX $SLB $GNTY $HAS $LRCX $DOW $AXP $TFC $SBNY $ABT $TRV $UNP $PLD $PM $NDAQ $STLD $BKR $ISRG $CSX $ANTM $NEE pic.twitter.com/PqWkcv6vpB

— Earnings Whispers (@eWhispers) April 16, 2022

Last week, Taiwan Semiconductor Manufacturing (TSM) crushed their numbers for the first quarter AND guided higher for Q2.  TSM gapped up at the open, and then sold off throughout the day, ending down ~3%.  If we were in a strong bull market, that wouldn’t have happened.

Best To Your Week!

Invest Safely, LLC is an independent investment research and online financial media company.  Use of Invest Safely, LLC and any other products available through invest-safely.com are subject to our Terms of Service and Privacy Policy. Not a recommendation to buy or sell any security.

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

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

ANALYSIS
The stock market outlook remains in an uptrend while we wait for confirmation of its next move. The signal could go either way based on market action this week.

The S&P500 ($SPX) fell 1.3% for the week. The index remains above the 50-day moving average, but did break the 200-day before coming to rest at that level to end the week.

SPX Price & Volume Chart for the Week of April 10 2022

The ADX fell below 20, meaning the market is no longer trending.  The directional indicators crossed over mid-week, and remained bearish by a few tenths of a point.

Price and volume wasn’t much help either.  The index is still above the 50-day while 2 distribution days popped up.

SPX Elliott Wave Analysis for the Week of April 10 2022

Elliott Wave is still mixed, since the SPX is still between confirmation levels.  4650 – 4670 to the upside and 4300 to the downside, though a close below 4416 would probably be enough.

COMMENTARY
The U.S. Federal Reserve released minutes from their March meeting last week.  There’s nothing truly “new”; instead, the minutes show the likely path the Fed will take to try and lower inflation.

In addition to 0.5% rate hikes, which are now more probable rather than just a possibility, Fed members are in agreement on reducing the Fed’s balance sheet (so-called Quantitative Tightening).  Per Bloomberg, the treasury market is pricing in ~9 rate quarter-point rate hikes by the end of 2022!  Seems unlikely, but stranger things have happened…

Markets are closed for Good Friday, making this a shorter trading week. But that doesn’t mean there aren’t opportunities for fireworks. March CPI data will be released Tuesday before market open, and retail sales come out on Thursday.  And members of the Fed have speeches almost every day! So the stock market gets a few chances to show us what’s already being priced in versus what still needs to be digested.

Q1 earnings season also kicks off this week, with several major banks reporting on Wednesday and Thursday).

And finally, the third Friday in April is options expiration, so monthly/weekly option expiration will shift to Thursday due to the market closure.

Best To Your Week!

Invest Safely, LLC is an independent investment research and online financial media company.  Use of Invest Safely, LLC and any other products available through invest-safely.com are subject to our Terms of Service and Privacy Policy. Not a recommendation to buy or sell any security.

Stock Market Outlook entering the Week of April 2nd = Uptrend

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

ANALYSIS
The stock market outlook starts Q2 in an uptrend. The question is how long it will stay that way.  The S&P500 ($SPX) continues to trade above the 50 and 200 day moving averages, but only managed to climb 0.1% for the week.  During the first quarter of 2022, the index dropped ~4.6%.

SPX Price & Volume Chart for the Week of April 03 2022

Two of the three indicators used for the stock market outlook (ADX & price/volume) remain bullish.

SPX Price & Volume Chart for the Week of April 03 2022

Elliott Wave shifts to mixed, with the current wave count suggesting the downtrend is back underway or will be shortly. The SPX met retracement requirements for a typical B-wave, so Tuesday’s high could mark the end of the bear-market rally.

There wasn’t a divergence in the RSI or the MACD.  Even though divergences aren’t a must-have, they’re useful confirmations.  The RSI actually made a higher high, which is usually associated with a 3rd wave. That’s shown in the chart and puts the SPX in a Minute [iv].

Based on that analysis, I’m looking for one more run at the 4650 – 4670 before the Minor C / Intermediate B-wave completes.  A drop below 4300 invalidates the [iv], and means that Tuesday’s high was indeed the completion of Intermediate B and the uptrend.

COMMENTARY
Guessing you heard something about the yield curve last week? If not, the “tens and twos” inverted, meaning that the yield on the 10-year treasury note was lower than the yield on the 2-year treasury note.

Normally, financial conditions farther out into the future are more uncertain, which means more risk of loss. To compensate, investors require higher yields. When the curve (or sections of it) inverts, the bond market expects higher uncertainty in the near term.

Right now, the curve appears to be adjusting to the Fed’s rate hike plans. The 3-month sits just above the rate set by the Fed (~.25%) and the 2-year yield is ~2.45%, which is basically where the Fed wants to be after all their rate hikes.

Last week’s jobs report contained all kinds of “positive” information: unemployment fell to 3.6%, average hourly earnings increased by 5.6% year-over-year, and labor force participation is climbing. These figures will be used as a sign that the economy is doing well, supporting the Fed’s planned rate hikes.

But you know the name of the game is really GDP.  If GDP is on the rise, then tightening monetary conditions will be uncomfortable but tolerable; the so-called “soft landing” mentioned by the talking-heads.  If GDP is dropping, then tightening monetary conditions will be very painful and cause a lot of asset classes to lose value.  In that case, better to run through your diversification checklist and resulting asset allocations before that happens.

In terms of stocks, you may find some cover in sectors like consumer staples, health care, and utilities, but that’s not a guarantee.  Each cycle is different.

And diversification doesn’t necessarily mean you’ll make money; sometimes you’ll just lose less. It’s all relative. If you reference the S&P500 like most investors, then a 5% drop in the SPX is your baseline for Q1, for example. If your portfolio only lost 3%, you actually outperformed the SPX by 2%. Diversification achieved!

Finally, sometimes cash is your best/only choice.  And while it’s true that adjusting for inflation means cash is losing value, that same adjustment makes losses in the stock market even worse.

Best To Your Week!

Invest Safely, LLC is an independent investment research and online financial media company.  Use of Invest Safely, LLC and any other products available through invest-safely.com are subject to our Terms of Service and Privacy Policy. Not a recommendation to buy or sell any security.

Stock Market Outlook entering the Week of March 27th = Uptrend

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

ANALYSIS
The stock market outlook uptrend designation remains in place for a second week, with the S&P500 ($SPX) rising 1.8%.  Can we make it three in a row?

The index rose above the 200-day moving average and stayed there.  And the three indicators (ADX, price/volume, and Elliott Wave) show bullish price action in place.  Looking good so far, but a deeper look reveals concerning undercurrents.

SPX Price & Volume Chart for the Week of March 27 2022

The biggest issue is trading volume, which decreased throughout the week.  If you discount the quarterly, monthly, and weekly option expiration on March 18, trading volume has fallen for almost the entire uptrend!  Rising prices on decreasing volume is a sign of weakness, not strength.  When there’s a lack of sell order volume, it takes a relatively low level of buying to clear out those orders and move prices higher.

SPX Elliott Wave Analysis for the Week of March 27 2022

From a technical analysis standpoint, the SPX is knocking on the door of the resistance levels mentioned last week.  The 61.8% Fibonacci retracement sits 7 points above Friday’s close of 4543, and that’s a stone’s throw away from the early February resistance at 4595.  A negative divergence in the RSI(5) also popped up last week as the market made new highs.

COMMENTARY
As of Friday’s close, the SPX sits ~9% from the mid March low. Essentially, the market has halved it’s losses from the start of the year despite all the geopolitical turmoil and interest rate variability!  Mega-cap tech stocks also rebounded nicely the past 2 weeks (e.g. $AAPL, $GOOGL, $AMZN, $TSLA, etc.).

But the gains aren’t evenly distributed.  If you look at sector performance for Q1, energy ($XLE) is by far the star, gaining ~39%.  Since the S&P is down ~5%, that means it’s outperformed the index by 44%! Utilities ($XLU), and financials ($XLF) also outperformed, while telecom ($XLC), consumer discretionary ($XLY), and real estate ($XLRE) underperformed.

As we head into Q2, remember that most companies will have extremely tough year-over-year comparisons to overcome, in terms of revenue and profitability.  This is especially true for sectors like technology ($XLK) and consumer discretionary ($XLP).  And most “passive investors” are overexposed here, because the mega-cap stocks in these sectors make up a large part of most capitalization-weighted index funds.

So regardless of whether you’re bullish or bearish overall, last week was an excellent time to reallocate holdings.

Best To Your Week!

Invest Safely, LLC is an independent investment research and online financial media company.  Use of Invest Safely, LLC and any other products available through invest-safely.com are subject to our Terms of Service and Privacy Policy. Not a recommendation to buy or sell any security.