The Safe Investing Blog

Stock Market Outlook entering the Week of October 16th = Downtrend

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

ANALYSIS
The stock market outlook remains in a downtrend after another volatile week of trading.

The S&P500 ($SPX) fell 1.6% last week, closing ~9% below the 50 day and ~14% below the 200 day moving averages…not much different than last week.  The good news?  Historically speaking, the index doesn’t spend much time that far below the 200-day.

SPX Price & Volume Chart for the Week of October 16 2022

The ADX? Still bearish.  Price/volume remains in a downtrend for now.  Thursday’s reversal counts as “Day 1” of a potential rally. The most robust rally confirmations (>1.5% increase on higher than average trading volume) typically occur between Day 4 and Day 10, so be on the lookout next week.

SPX Elliott Wave Analysis for the Week of October 16 2022

After diving below the September low, Elliott Wave appears to show a completed 5-waves pattern.  That view is supported by positive divergences in both the RSI and MACD technical indicators.  The 5th wave looks compressed, time-wise, but that’s to be expected during highly volatility trading periods (VIX > 30).

If the count holds, a 3-wave, counter-trend rally is in play.  It’s possible to have a full retracement, back to 4325, but that seems unlikely given current economic conditions.  3900 is a 50% retracement of the August high and represents a ~9% rally from Friday’s close.  It’s also back in that middle of the May-June, July resistance “band”.  That’s just enough of a countertrend rally get bullish investors back into stocks before the next rug pull.

COMMENTARY
Another U.S. CPI report, another higher than expected reading.

• CPI
  • +0.4% MoM; +0.2% expected
  • +8.2% YoY; +8.1% expected
• Core CPI
  • +0.6% MoM; +0.4% expected
  • +6.6% YoY; +6.5% expected

Even though the Fed really cares about PCE, elevated CPI readings provide more cover for interest rate hikes at the next Federal Reserve meeting.  It also destroys the “peak inflation” rationale for any market bounces.

Peak inflation or not, the debt market is signaling more pain ahead for the economy and investors.  The yield curve inverted even further to -52 basis points or -0.52% (2 year vs. 10 year treasuries).  That’s the biggest inversion since the early 80’s!  How many of today’s advisors were managing money back then?  How many were even born back then?

It’s not just a U.S. phenomenon either; per the World Government Bonds website, 18 countries have an inverted yield curve, including:

• Chile
• Canada
• Czech Republic
• Hong Kong
• United States
• Poland
• Iceland
• Sweden
• South Korea
• Hungary
• Turkey
• Pakistan
• Kazakhstan
• Brazil
• Mexico
• Nigeria
• Ukraine
• Russia

Global recession risk indeed!  And that doesn’t count several countries with partially inverted yield curves.

Personally, I think the U.S. market is due for a tradable rally.  It won’t be the time to go all-in from an investing standpoint.  And before you regurgitate those stats about missing the 10 best days in the market, I have two things for you to consider:

1. The biggest one-day gains in stock market history have come in bear markets, not bull markets
2. Being OUT of the market for the 10 worst days has a bigger impact on your portfolio than being IN the market for the 10 best days (chart is old, but supports the point)

Source: LPL Research

Earnings season began last week with big banks reporting Q3 results; looks like they’re beating estimates, but down versus last year.  Pay attention to the rate of change in earnings; it will tell you much more about the company’s future prospects than whether or not they beat soft estimates.

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, Federal Reserve Bank of St. Louis, Hedgeye, U.S. Bureau of Economic Analysis, U.S. Bureau of Economic Analysis, WorldGovernmentBonds.com

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 October 9th = Downtrend

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

ANALYSIS
The stock market outlook remains in a downtrend after another volatile week of trading.

The S&P500 ($SPX) rose 1.5% last week, but that seems pretty tame considering its ~6% gain mid-week.  The index closed ~10% below the 50-day and ~15% below the 200-day moving average.

SPX Price & Volume Chart for the Week of October 09 2022

The ADX signal stays bearish, as the gap between the negative and positive direction indicators widened after Friday’s sell off.

Price & volume still shows a downtrend as well.  Monday is the fifth day of the latest rally attempt (started on October 3); watch for either a break below the September 30th low or a 1.5% increase on above average trading volume.

SPX Elliott Wave Analysis for the Week of October 09 2022

Elliott Wave shows a completed wave last week, but more movement is needed to confirm the wave count.  Either way, the September 30th low and last week’s high are support/resistance levels to watch.

COMMENTARY
Another week, another narrative ends in tears, as market commentators and participants continue their search for anything to justify their views that the Fed’s fight with inflation is over, the bottom is in and it’s time to buy stocks again.

Last weekend, Australia’s central bank decided to slow its pace of rate hikes (the “new” definition of a pivot).  Then, United Nations Conference on Trade and Development called on central banks to stop raising interest rates to avoid a global recession. Combined, these two events raised hopes the the Fed would “read the room” and change course.

On Tuesday, the JOLTS summary (Job Openings and Labor Turnover) showed a 10% decline in the number of job openings. Somehow that was interpreted as the economy “definitely” showing signs that interest rate hikes were working, soft landing achieved, etc. All that jawboning appeared with work, with the SPX up more than 5% by Wednesday’s high.

Friday’s release of nonfarm payroll data showed an increase in September, just above consensus estimates. The unemployment rate dropped to 3.5%, thanks in part to a lower labor force participation rate. Those data points aren’t high, but they’re not low either, and don’t provide enough “negativity” to justify the narrative of a shift in Fed policy. Reality set in, and stock prices retreated.

Would a pause or pivot in interest rate hikes be a “risk-on” event?  Definitely.  But for how long?  Remember that justifying a pivot or pause requires us to be the in midst of a really bad economic situation; one that would make interest rate policy the least of investors’ concerns.

This week, financial media will do it all over again while we await the release of CPI data on Thursday.  Keep in mind that the Fed doesn’t meet until November 1, and a lot can happen between now and then.  So no matter how many data points are connected, no matter how many past examples are cited, it’s all conjecture and guesswork until November 2.

Better to look for signs of a recovery in other areas:

• Yield curve (is it flattening?)
• U.S. dollar (is it weakening and/or becoming less negatively correlated to equities?)
• Earnings announcements (are they beating targets and/or raising guidance?)

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, U.S. Bureau of Economic Analysis, U.S. Bureau of Economic Analysis

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 October 2nd = Downtrend

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

ANALYSIS
The stock market outlook shows the S&P500 in a downtrend to start off October.

The S&P500 ($SPX) fell 2.9% last week, and ~13% over the past 3 weeks. The index sits ~11% below the 50-day and ~15% below the 200-day moving average.  Year to date, the SPX is down ~25%, which requires a rally of 33% to get back to even.

SPX Price & Volume Chart for the Week of October 02 2022

ADX and price volume are bearish, and look a lot like they did during the first week or two of May.

SPX Price & Volume Chart for the Week of October 02 2022

Elliott Wave shows 3-waves down (so far).  When the SPX dropped below the June low, the uptrend possibility went with it.

The long term view of Elliott Wave needed an update, and what better time then the start of Q4.

“Double Three” Pattern

I still favor the Double Three Pattern, as the weekly view continues to line up really well. We don’t know if the first leg down is 3 or 5 waves. In both cases, we’re due for a bounce.

SPX Elliott Wave Analysis for the Week of October 02 2022

If we get three waves down, another double three pattern is possible (3 waves, 3 waves, then 5 waves), and would likely produce the “shortest” bear market of the wave counts I’m tracking. We’ll see a bounce shortly, in the form of a new, 3-wave uptrend back towards to the 200-day.

SPX Elliott Wave Analysis for the Week of October 02 2022

If the first leg down is 5 waves, then the zigzag pattern above is likely (5 waves, 3 waves, then 5 waves).

SPX Elliott Wave Analysis for the Week of October 02 2022

It’s also possible that the whole correct is just a regular 5-wave corrective pattern.  From here on out, that pattern isn’t much different than the Double three with a zigzag in terms of inflation points and support/resistance levels.

COMMENTARY
Last week’s call for volatility didn’t disappoint.  Although I don’t think anyone was expecting a near collapse of U.K. pension funds!

We also saw some interventions in currency markets by the central banks of Japan and China.  Not as unexpected, but still volatility inducing.

Q3 earnings are starting to roll in, and the news so far is “not good”.  Many firms, especially retail, are sitting on too much inventory.  Even firms like Nike ($NKE) struggled, and they are typically on top of such things.

More worrisome are the increasing number of downward earnings revisions and outright misses.  It’s true that there’s a lot of bearish sentiment and most types of investment instruments are oversold levels.  It’s not true that too much negativity means stocks can only go up.

Long-term prices are based on forward looking earnings.  If companies miss on earnings or beat but revise their estimates downward, then their stock is almost immediately “overvalued”, and usually results in a price drop.

Moving on to numbers that aren’t dropping, remember the post a few weeks back mentioning the Fed’s focus on PCE, rather than CPI? Well, PCE came out last week and was higher than expected.  The higher reading wasn’t too surprising, given that CPI also came in higher than expected.  But higher PCE also means a pivot or pause in interest rate hikes is even less likely.  Or, to put it another way, justifying a pivot or pause requires an increasingly “bad” situation to unfold.

Almost on cue, the scuttlebutt this weekend was that a major financial institution is in serious financial trouble due to recent interest rate and currency swings.  If I had to guess, I’d go with Credit Suisse based on their widening credit spreads; not quite as high as 2008, but it’s not 2008 either.  Hopefully the rumors turn out to be false, but they’re not the type of thing you hear at the start of a new bull market or big rally either.

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, US Bureau of Economic Analysis

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 September 25th = Downtrend

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

ANALYSIS
The stock market outlook remains in a downtrend heading into the final week of the 3rd quarter.

The S&P500 ($SPX) fell 4.6% last week, pressured by hawkish monetary policy around the globe. The index currently sits 8.5% below the 50-day, and ~13% below the 200-day moving average.

SPX Price & Volume Chart for the Week of September 25 2022

All three indicators are bearish, with clusters of distribution days clearly showing institutional selling since the end of August.

SPX Elliott Wave Analysis for the Week of September 25 2022

COMMENTARY
The U.S. Fed raised interest rates 0.75% this week. Judging from the sell-off that following, a majority of market participants may have finally accepted the Fed isn’t planning to lower rates any time soon. Several investment banks even lowered their year-end targets for the SPX.

Increasing rates and asset class sell-offs aren’t a U.S.-only phenomenon. Central banks across the globe are raising rates to fight off inflation while seeing their stock markets drop. The new U.K. government went as far as announcing a stimulus plan, and no one like that either! Because, you know, inflation.

U.S. housing data was mixed. A continued slide in sales was offset by declining prices and an unexpected jump in housing starts (year over year).

The set-up for this week is definitely volatility!

Professional money managers and hedge funds face another quarter of sub-par returns, so they might try to engineer last minute profits and/or reduce losses. We’re due for some kind of bounce after last week’s sell-off, and a lot can be done with options these days.

Unfortunately, companies that have held up well, like Apple, could be sold into any rally specifically because they’ve held up well. If you want to lock in gains, you have to sell investments that still have them…just like everyone else. And if stocks with high market capitalization, like Apple, are sold off, market-weighted indexes like the S&P500 also sell off.

The VIX sits just below 30, above which is the level that stocks become uninvestable (or “F” bucket those of you that work with Hedgeye).  So even if we do get a month end rally, it’s not the time to be putting money into stocks.

With rates rising, bond volatility is also elevated (^MOVE – Bank of America’s Bond Volatility Index is above 110 or so), so bonds aren’t the place to be either.

Cash is the safest place, specifically the U.S. dollar.

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, US Bureau of Economic Analysis

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 September 18th = Downtrend

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

ANALYSIS
The stock market outlook remains in a downtrend, with bearish signals across the board.

The S&P500 ($SPX) fell 4.8% last week, succumbing to worse than expected inflation data and option expiration. The index fell from a prior trendline, the traditional technical pattern of retesting prior support/resistance.

SPX Price & Volume Chart for the Week of September 18 2022

Thanks to Tuesday’s big drop, the ADX directional indicators flipped back to bearish, as did price & volume.  The index gaped down to the 50-day and kept going on higher trading volume, and followed that up with 2 more days of institutional selling Thursday and Friday.

Elliott Wave still shows the downtrend in progress.  The chart below includes a few adjustments to wave labels, but still tracks the Double-Three corrective pattern.  At this point, the SPX completed the initial “flat” segment in mid-June, and 3-waves up in mid-August qualifies for the next “any 3-wave pattern” segment.

Now comes the hard part, as any corrective pattern is possible is the Double-Three remains valid. The index could experience another “flat” pattern, a traditional “zigzag” pattern, or something else.  In all cases, there’s a very high probability the SPX falls below the June low.

SPX Elliott Wave Analysis for the Week of September 18 2022

COMMENTARY
August CPI data disappointed many market participants before the stock market opened on Tuesday.  The CPI index rose 0.1% from July, while year-over-year data showed annual inflation fell slightly to +8.3%.  Core CPI increased 0.6% from July, with the year-over-year reading at 6.3% (July’s y-o-y figure was 5.9%).

August producer prices were a bit better, but not by much.  Wednesday’s release showed PPI dropped 0.1% month-over-month, while the year-over-year reading remained constant at 8.7%.  Core PPI rose 0.2% m-o-m, with the y-o-y figure showing an increase of 5.6%.

Retail spending data came out Thursday, and continued to show a weakening consumer.  And Friday’s quadruple witching day didn’t disappoint, in terms of volatility and trading volume.

I wasn’t expecting CPI to have such a dramatic impact on the market, but it appears that investors and traders drank too much “peak inflation” kool-aid and had to readjust their hedges ahead of Friday’s option expiration.

To be fair, I also thought we had seen a peak in inflation data.  Most narratives over the past 3 months have said that inflation had peaked, the market had already accounted for all the rate hikes, the end is near for this Fed hiking cycle, buy the dip, etc.

But the bond market continues to signal more risk in the near term, peak inflation or not (i.e. it remains steeply inverted).  And corporate earnings still have NOT priced in the impact of higher inflation (i.e. slowing retail spending).  So the market sell-off itself wasn’t so surprising.

This week, the U.S. Fed is set to hike interest rates again; Fed watchers expect another 0.75% increase.   There’s also a slew of housing data set to be released Monday through Wednesday, and it’s likely adds to the case for an ongoing economic slowdown (despite inflation).

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, US Bureau of Economic Analysis

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 September 11th = Downtrend

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

ANALYSIS
The stock market outlook stayed with a downtrend, despite of some short-covering ahead of this week’s event risks.

The S&P500 ($SPX) rose 3.6% last week, finding support near 3900 (the late May early July support/resistance area) for a second week.  The SPX even managed to reclaim the 50-day moving average on Friday.

SPX Price & Volume Chart for the Week of September 11 2022

Also on Friday, the ADX directional indicators flipped to bullish.  Even with the move above the 50-day moving average, the price/volume signal only shifts to mixed.  Friday’s move came on lower and below-average trading volume, and the distribution day count is elevated at 6.

SPX Elliott Wave Analysis for the Week of September 11 2022

The Elliott Wave shows a completed first wave for the new downtrend, so the counter-trend rally isn’t too surprising.

COMMENTARY
Tricky week ahead with three market moving events on tap, so I fully expect more chop as traders adjust their portfolios and hedges.

The latest CPI numbers are released on Tuesday, followed by PPI numbers on Wednesday.  It’s hard to know how stocks will react, so I’ll be watching the yield curve to see the expected impact, if any, to Fed policy.  Friday is a quadruple witching day, with quarterly, monthly, weekly options and futures contracts expiring.

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, US Bureau of Economic Analysis

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 September 4th = Downtrend

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

ANALYSIS
The stock market outlook flipped to a downtrend last week as U.S. equities continue to sell-off.  The S&P500 ($SPX) dropped a little more than 3% last week, finding some support near 3900 (the late May early July support/resistance area).

SPX Price & Volume Chart for the Week of September 04 2022

In terms of short-term trendlines, an uptrend drawn through closing prices broke last Tuesday, while a trendline through daily lows remains intact.

On Tuesday, price & volume joined the ADX in signaling a downtrend, after the SPX sliced through the 50-day moving average on increased trading volume.

SPX Elliott Wave Analysis for the Week of September 04 2022

Elliott Wave also flipped to a downtrend when index closed below the June 28 intraday high of 3,946, causing Wave 4 to overlap Wave 1.

COMMENTARY
Since touching the 200-day moving average 3 weeks ago, the SPX corrected ~10%! I know I wrote about downside risk and choppy price action, but that was a bit more than I expected.

Recent price action is a good reminder that anything’s possible.  Some back and forth whipsawing wouldn’t surprise me one bit with Wall Street returning to the trading desks.

A few economic data points came out last week. All of them are backward looking, but could support a view that the U.S. economy hasn’t been impacted by recent rate hikes and can therefore handle more.

The Job Openings and Labor Turnover Summary or JOLTS for July was essentially unchanged from June. The August ISM data for manufacturing PMI remained the same as July with a reading of 52.8 (>50 indicates expansion in manufacturing activity). And total nonfarm payroll employment showed a 0.2% increase in unemployment, up to 3.7%.

U.S. markets are closed Monday (today) for Labor Day.

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, US Bureau of Economic Analysis

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.