The Safe Investing Blog

Stock Market Outlook entering the Week of August 7th = Uptrend

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

ANALYSIS
The stock market outlook enters week 3 of the current uptrend, but failed to make much progress last week.

The S&P500 ($SPX) got caught in highlighted resistance band, sandwiched between the lows of March and the highs of early June.  For the week, the index rose 0.4%.

SPX Price & Volume Chart for the Week of August 07 2022

All three signals remain unchanged. The ADX shows strengthening bullish price action, but the overall reading isn’t high enough to say the trend is “strong”/

Price/volume shows an uptrend in place.  Trading volumes were below average, but there’s not much in the way of institutional selling either.

SPX Elliott Wave Analysis for the Week of August 07 2022

Elliott Wave remains mixed. We don’t know if it’s the 5th wave in a bullish count (3rd wave of an uptrend) or a bearish count (completed C-wave). An RSI divergence developed, supporting a completed 5th wave in either case.  But the index rose above the target price range for the bearish “flat” pattern.   See the end of the post for weekly and monthly views.

COMMENTARY
As of Friday morning, 87% of the SP500 had reported earnings; average revenue is up 15% year over year, and earnings are up 9%.  Those are better than the aggregate numbers mentioned last weekend, when 50% of the index had reported.  The data shows that overall, companies overcame macro headwinds and challenging year-over-year comparisons.

Source: Hedgeye Risk Management

That said, a large portion of the overall improvement came from the energy sector (22 of 23 companies reporting), which averaged a 77% increase in revenue and a 308% increase in earnings!  That skews the average a bit, and masks weakness in other sectors of the economy (Financials, Communications, Consumer Discretionary, etc.).

On Friday, we found out that the U.S. economy added 528,000 jobs in August.  That’s more than double estimates for and increase of 258,000 jobs, which means we’ve recovered all the jobs lost during COVID-19 shutdowns (in aggregate).  That puts the U.S. unemployment rate back to a pre-pandemic level of 3.5%.

From an employment standpoint, that’s great news.  Unfortunately, that means the Fed has a green light to continue hiking rates.

Think about it.  The Fed’s so-called “dual mandate” is low inflation and full employment.  Right now, they’re on a mission to reduce inflation ~9% to 2% as fast as possible with as little as possible unemployment (the “soft landing”).  After “big” rate hikes and QT, we see signs that inflation is just starting to ease, but unemployment is at all time lows.  To me, that seems like the all clear to continue aggressive rate hikes, not take them off the table.

That would be an issue for all those CNBC narratives saying markets rallied because inflation has peaked and therefore so have interest rate hikes.

Best To Your Week!

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

Sources: Bloomberg, CNBC, Hedgeye

P.S.S. Weekly / Monthly Elliott Wave Charts

SPX Elliott Wave Analysis for the Week of August 07 2022

In a weekly view, we see the SPX retracing a bit less than 50% from the January high to the June low. If the March 2020 low was the start of a new bull market (i.e. Cycle III wave, which is not the count shown above), then it’s possible that the 2nd wave correction is complete. I don’t see too many people that bullish on stocks at this point.

SPX Elliott Wave Analysis for the Week of August 07 2022

Going out even further, we see the SPX gained 4151 points from the 2009 market bottom (667) to the 2022 market to (4818), for a gain of 622% (Cycle I wave)!  At the June low of 3637, the SPX retraced 28% of the total bull run. As of Friday, the closed at 4145, which is a 16% retracement of the total bull run. Neither of those retracements would satisfy a Cycle II corrective wave, lending support to the view that the bear market isn’t over.

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Not a recommendation to buy or sell any security.

Stock Market Outlook entering the Week of July 31st = Uptrend

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

ANALYSIS
The stock market outlook kicks off week 2 of an uptrend, as stocks went risk-on despite an interest rate hike, negative GDP print, and continued earnings deceleration.

The S&P500 ($SPX) found support at the 50-day moving average Tuesday, closing the week up 4.3%. The index is back near highs of early June, or lows of March, whichever you prefer.  Either way, that zone creates a lot of overhead resistance (i.e. bag holders) for traders to work through.

SPX Price & Volume Chart for the Week of July 31 2022

No change in the underlying signals:  ADX shows a bullish trend, as does the Price/Volume signal, while Elliott Wave is mixed.

SPX Elliott Wave Analysis for the Week of July 31 2022

The bearish count, shown above, puts the market towards the end of the ongoing bear market bounce, with the index closing just above a target range for the C-wave of a 3-3-5 “flat” pattern.  The RSI didn’t confirm a top (via a divergence), but that’s not necessarily required to end a corrective flat (see late March).  A plausible (but not yet probable) bullish count, with the entire correction ending at the mid-June low, puts the SPX in the middle of the first wave of the next bull market.

COMMENTARY
“Better than expected” was last week’s mantra when it came to financial markets.

For earnings, we touched on the issue of beating estimates verses year over year comparisons.  As of Friday morning, 264 companies in the S&P500 had reported, with aggregate, year-over-year earnings falling -2%. Even positive headlines weren’t all they were cracked up to be.

Take Apple ($AAPL) for instance. The company beat Wall Street expectations for sales and profit. But the year over year numbers weren’t great. Revenue was up 2%, but earnings per share were down 8%. So even though their sales increased, their expenses increased more.

Amazon ($AMZN) also reported financial results, with a similar story to Apple. Headlines said the company reported better-than-expected Q2 revenue ($121B actual vs. $119B expected) and the outlook for Q3 was “upbeat”. What about earnings; you know, actual profit? That figure came in at a loss of 20 cents per share. The company also cut ~100k people from it’s workforce.

Some will point out that there are investment related losses in Amazon’s EPS figure, which is true. There’s ~$2B in losses from their investment in the electric truck manufacturer Rivian alone. So look at operating income, which excludes the investment-related losses. That metric hit $3.3 billion…down from $7.7 billion in Q2 of 2021…or 57% lower y-o-y.

The result? Amazon’s stock price rallied 13%. You’d be hard pressed to find an answer to “tell me we’re in a bear market bounce without telling me we’re in a bear market bounce”.

The U.S. Federal Reserve hiked short-term interest rates another 0.75%. Chairman Powell slipped in a reference to approaching the “natural interest rate” (whatever that means), and many people interpreted that as a sign the worst is over from a tightening perspective. Then I read an opinion that instead of 0.75% to 1% hikes, the Fed is only expected to hike 0.50, 0.25, and 0.25 over the next 3 meetings. We must have been watching different press conferences.

Inflation has likely peaked, as we discussed before.  But even if it gets cut in half by the end of the year, which is unlikely, it would STILL be double the Fed target of 2%.  And that doesn’t even consider the ongoing impact of the Fed balance sheet reductions.

Q2 GDP couldn’t keep up with expectations though, contracting -0.9% (a small increase increase was expected). The reading is the second consecutive quarter of negative growth (Q1 declined 1.6%).

Source: Bureau of Economic Analysis

Since the common definition of a recession is two consecutive quarters of negative GDP, you can see why there was so much airtime devoted to the topic last week. It seems that the 2 quarter definition is actually a rule of thumb, not anything “official”.  Pundits argue that the U.S. can’t be in a recession because:

1. The consumer is “strong”
2. Corporate earnings aren’t “as bad as expected”
3. Unemployment is “low”

It’s all relative of course, which means being “selective with data” like consumer spending and earnings comparisons as we’ve reviewed in prior posts.   But unemployment really is low verses historical data, so I guess 1 out of 3 isn’t bad.   And we can always slice and dice employment data if the recession picks up speed and unemployment threatens to increase.

Financial media (social, online, and otherwise) is awash in calls that the bottom is in, and it’s time to get off the sidelines.  Unfortunately, that’s not how market bottoms are made, from a sentiment perceptive.

Rest assured, the next bull market is coming, and will offer great buying opportunities.  But those opportunities typically occur when retail investors throw in the towel and are disgusted with stocks, not buying them because data isn’t as bad as expected.

In the meantime, look for companies that provide products and services you need to buy regardless of inflation (e.g. consumer staples ($XLP) and utilities ($XLU) ), with low beta values.

Best To Your Week!

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

Sources: Bloomberg, CNBC, Hedgeye

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 is 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 July 24th = Uptrend

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

ANALYSIS
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.

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.

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.

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.

COMMENTARY
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.

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 is 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 July 17th= Downtrend

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

ANALYSIS
The stock market outlook stays with the downtrend, since the S&P500 didn’t make much progress last week. The S&P500’s ($SPX) second attempt to break-through May resistance levels failed, and now we’re on to the third. For the week, the index fell 0.9%.

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

No change in the ADX directional indicators (bearish) or price/volume action (mixed). And add two more distribution days.

SPX Elliott Wave Analysis for the Week of July 17 2022

The Elliott Wave signal retreats to mixed this week.  The S&P500 briefly fell below last week’s “higher low”, breaking support at 3739.   As mentioned last week, trading firms actively trade support and resistance levels, so the recover Thursday and Friday isn’t that surprising.

COMMENTARY
US CPI data for June showed an increase of 9.1% verses a year ago and 0.5% higher than last month. Expectations were already high (8.8%), so coming in below expectations wouldn’t REALLY be something to celebrate. The smallest sliver of a silver lining was Core CPI, which +5.9% higher than last year, but down from the 6% y-o-y reading last month.

This situation is playing out across the globe, not just the United States.  Take a look at some CPI data from Europe:

• Denmark = up +8.2% from +7.4%
• France = up +5.8% from +5.2%
• Germany = flat at +7.6%
• Norway = up +6.3% from +5.7%
• Portugal = up +8.7% from +8.0%

Another key inflation dataset, the U.S. producer price index (PPI), reported an increase of 11.3% y-o-y.  Finally, the spread between 2-year and 10-year treasury notes hit -26 basis points (biggest negative spread in 22 years), ended the debate about yield curve inversion.

Even if future rate hikes are already priced in (June CPI & PPI guarantee more hikes) and the effect of quantitative tightening negated (it isn’t), most corporate earnings guidance hasn’t been taken down yet. The few firms that have made adjustments (e.g. Target, Walmart, Restoration Hardware) saw their stock price crushed.

What happens to the market if/when companies with large weightings (e.g. Apple, Google, Tesla) decide to revise guidance lower?  We’ll soon find out.  Earnings season kicked off last week, with JP Morgan missing estimates and suspending its stock buyback program, citing “‘never-before-seen” conditions. Morgan Stanley didn’t fair much better.   Both stocks were hammered.  Citigroup beat expectations and maintained guidance for the year, and enjoyed some pretty strong price action.

DO NOT base investment decisions on the fact that a stock is down double-digit percentages from an all time high. When someone says a stock is “cheap” because its price has been cut in half, they’re assuming the stock was valued correctly in the first place. Chances are it was not, and that’s before considering the new interest rate environment going forward.

Rising interest rates increase the cost of capital, which increases corporate expenses and suppresses future earnings growth. So as long as central banks are changing interest rates and financial conditions, valuations and stock prices also need to be adjusted.

In other words, a stock that looks “cheap” verses a year ago (low interest rates, economy re-opening, stimulus checks and quantitative easing) may actually still be “expensive” when compared to future earnings (rising interest rates, recession, quantitative tightening).

Best To Your Week!

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

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 is 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 July 10th= Downtrend

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

ANALYSIS
The stock market outlook remains in a downtrend, although the markets show some bullish momentum.

The S&P500 ($SPX) is making a second attempt to break-through the resistance zone created by the May lows.  Basically, the index is back to where it was 2 weeks ago, just with less trading volume.  Institutional investors and hedge funds like to front-run technical price levels (e.g. trendlines and moving averages), so keep an eye on volatility this week.

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

The ADX is still bearish and price/volume remains mixed.  The latest rally moved off life-support, since the SPX got back above the follow-though price level.  But isn’t out of intensive care yet.  Trading volume took a vacation last week, and the index still has those two distribution days.

SPX Elliott Wave Analysis for the Week of July 10 2022

The Elliott Wave signal is the first to shift to an uptrend, thanks to the “higher low” last week and an update to the count.  This bear market has been hard to map, let alone trade.  Think of this as another chance to redeploy capital and/or limit losses into a counter-trend move, not an all-out, risk-on rally.  Support is the new “higher low” at 3739, while resistance remains at 3945.

COMMENTARY
A holiday shortened trading week was probably something everyone needed, and it showed with trading volume running well below average.  The best performances came from heavily shorted stocks and/or those with high beta.  And big moves on low volume in those sectors is typical of short-covering rallies.  Going into the week, most hedges were shorting the major U.S. indexes (S&P500, NASDAQ and Russell 2000).  The narrative was that traders were TOO bearish ahead of earnings season, so they took advantage of the holiday week to make changes.

The June jobs report was better than expected.  The U.S. economy created 372,000 jobs, which was much higher than the consensus estimate for 270,000.  Hourly earnings from May were in-line with estimates, and up slightly year over year.  If the Fed were to meet tomorrow, this data justifies another 0.75% rate increase.  But any and all data released prior to their next meeting could be enough to shift policy.

At this point, “peak” inflation is likely priced into the market.  That’s does NOT meant that the financial markets have priced a relatively high level of inflation over a sustained period of time.  For example, commodity prices may be falling from their peaks, but it takes time for those declines to work through supply chains.  Therefore, recession metrics and earnings/guidance will have the bigger impact on market direction for the rest of the year.

Best To Your Week!

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

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 is 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 July 3rd = Downtrend

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

ANALYSIS
A downtrend for the stock market outlook remains in place to start July. The S&P500 ($SPX) couldn’t get past the resistance zone created by the May lows, ending the week down ~2%.

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

We didn’t get any strong up days last week, so the ADX stays bearish. Price/volume remains mixed, with the latest attempt on life support after the index closed below the follow-through day on Thursday.  Trading volume remains an issue, and the index picked up two distribution days already.

SPX Elliott Wave Analysis for the Week of July 03 2022

Elliott Wave remains mixed.  Depending on how you interpret the waves, the SPX could be in the second wave of a bear market rally or the third wave of another wave down.  Benefit of the doubt goes to a bear market rally, thanks to positive divergences in both RSI and MACD.  3636 support and 3945 resistance are validation levels.

COMMENTARY
Summer trading is in session and with it lower volume. Thursday was an exception, likely caused by a final round of quarter-end performance adjustments from hedge funds.  They’re not doing so well this year, but that’s true of most investors.

U.S. markets are closed Monday in observance of Independence Day.  Unemployment and hourly earnings data are release this week. Otherwise, it should be the calm before the storm, with earnings season starting the week of the 11th.

Best To Your Week!

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

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 is 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 June 26th = Downtrend

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

ANALYSIS
A downtrend for the stock market outlook remains in place the last week in June, with price action looking similar to the end of May.

The S&P500 ($SPX) rose a little more than 6%, but remains ~4% below the 50-day and ~13% below the 200-day. Friday’s strong move put the SPX into the middle of a resistance zone created by the May lows.

SPX Price & Volume Chart for the Week of June 26 2022

The ADX stays in bearish territory for now.  Another strong up day this week likely flips the signal to bullish.

Price/volume moves to mixed, with a follow-through on Day 4 of the latest rally attempt (Day’s 4 through 10 is the window for confirmation). Unfortunately, there are issues. Ideally, a rally begins with the index above the 50-day moving average. The index remains below that level, which creates overhead resistance for any fledgling uptrend.

More concerning than the price level is the trading volume. Both the rally start and the follow-though came on higher than average trading volume, but not because traders were bullish or fundamentals supported those moves. Instead, trading volumes were elevated by market “events”; quarterly options and futures expiration (quadruple witching day) and index rebalancing, respectively.

SPX Elliott Wave Analysis for the Week of June 26 2022

Elliott Wave also shifts to mixed, thanks to the MACD divergence finally showing up.  It’s very small, but it’s there, so another bear market rally is in play.  The SPX retraced ~50% of the June early to mid June drop, which is the minimum retracement for a 2nd wave.  The maximum would be 100%, or the June high near 4200.  Passing that level invalidates the current count, but not the bear market downtrend.

COMMENTARY
Summer started last week, and with it a relatively quiet time for the market, in terms of data.  Earnings season starts in 3 weeks, and trading volume around the 4th of July holiday in the U.S. is traditionally low.  Maybe buyers will be able to bid up the price and we see a face-ripping, bear market rally?  Maybe not.

As Mark Douglas states in his book “Trading in the Zone”, the first fundamental truth of trading is “Anything can happen”.

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 is subject to our Terms of Service and Privacy Policy. Not a recommendation to buy or sell any security.