The Safe Investing Blog

Stock Market Outlook entering the Week of September 27th = Downtrend

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

ANALYSIS
The stock market outlook continues show a downtrend to start this week, with the ADX, price/volume, and Elliott Wave in downtrends.

2020-09-27-SPX Trendline Analysis-Daily

The S&P500 ($SPX) continues correcting towards the 200-day moving average. The ADX and price/volume remain bearish; price remains below the 50-day moving average with a high level of institutional selling.

If the bearish trendline holds, prices should retreat early this week. On the bullish side, look for a large advanced on high trading volume as a signal that a new rally is taking shape.

2020-09-27-SPX Elliott Wave Analysis-Daily-Intermediate 1

For the Elliott Wave signal, price fell below 3279 during the week, invalidating the 3rd wave count shown previously and confirming the near term downtrend.

I’ve researched a few different viewpoints, and settled on Intermediate 1 of the Primary C wave.  It’s a very bearish count and suggests the S&P will retest the March low.  I only think that’s possible if we have a very gradual, slow moving decline.  Any kind of volatility, and expect the Fed to step in to support the market.  If/when that occurs, the count likely shifts to a bull count (e.g. Primary [A] shifts to a Primary 2, Primary [B] shifts to a Intermediate 1, etc.)

Either way, the Elliott Wave signal is in a downtrend to start the week. If the S&P can get above 3310, then the current leg of the downtrend is probably over, since the current wave shouldn’t overlap with the prior wave peak from Sept 11.

COMMENTARY
As expected, September wasn’t a great month for U.S. stocks. But that doesn’t mean we’re out of the woods yet. It’s an election year, so next month we’ve got the “October surprise”. And if that last election is any indication, stocks could be in for a wild ride in November.

Best to your week!

Stock Market Outlook entering the Week of September 20th = Downtrend

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

ANALYSIS
The stock market outlook switches to a downtrend to start the week. The ADX signal was joined by the price/volume signal in bearish territory, while Elliott Wave isn’t too far away from a switch either.

2020-09-20-SPX Trendline Analysis-Daily

The S&P500 ($SPX) is still ~7% away from the 200-day moving average. More concerning was Friday’s drop below the 50-day moving average on higher than average trading volume.

The ADX flip flopped again last week, and again starts the current week showing a bearish environment.  A couple of heavily selling days and a drop below the 50-day landed the price/volume signal in downtrend territory, as mentioned in last week’s post.

Friday was a quadruple witching day, so option expiration skewed price movements somewhat. Still, it’s better to protect your capital; be safe not sorry. Look for a rebound from the 50-day on strong volume to confirm that the correction is complete.

2020-09-20-SPX Elliott Wave Analysis-Daily-Intermediate C

For the Elliott Wave signal, price only fell to 3292, so the current count remains in place. If the S&P falls below 3279, then the count will need to be adjusted and this signal will likely flips to a downtrend as well. Otherwise, we should start the 5th wave shortly and head higher.

COMMENTARY
In Europe, we could be seeing the start of a second coronavirus wave.

If you’ve been trading this uptrend and recently entered positions, remember to keep your losses small and sell if your 7-8% below your buy price. The big tech names that were driving the indexes higher are near their 50-day moving averages, so don’t fight the market. You can always buy back in when and if prices recover.

When planning your trades, keep in mind that September isn’t great for stocks historically, and we typically see a sell off during the second half of the month.

Best to your week!

Stock Market Outlook entering the Week of September 13th = Uptrend

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

ANALYSIS
Despite last week’s volatility, the stock market outlook is still in an uptrend.  The ADX starts bearishly, price/volume is mixed, and Elliott Wave shows an uptrend.

2020-09-13-SPX Trendline Analysis-Daily

We can’t say the sell off was a surprise, given how much the S&P500 ($SPX) was extended from the 200-day moving average.  The technology sector took the brunt of the selling, with the Nasdaq dropping ~10% from it’s all time high in 6 days of market action.

The ADX flip flopped during the week, ending up back where it started:  showing a bearish environment.

The S&P added a few distribution days in succession, while price remained above the 50-day moving average.   Another 2 or 3 days of heavy selling, coupled with a break of the 50-day, will put this signal into the red.

2020-09-13-SPX Elliott Wave Analysis-Daily-IntermediateC

For the Elliott Wave signal, price stayed above 3279 (the end of the first wave in the summer uptrend), so the current count remains in place.

It remains to be seen if all the damage is done, or if there’s more to come.  Throughout the uptrend, sell-offs have been over quickly, so the 4th wave could be over already!  But September isn’t a good month for stocks, so a quick recovery may not be in the cards either.

COMMENTARY

This week, I’m going to send you over to Cumberland Advisors and David R. Kotok.  He provides access to a fascinating perspective from Brent Donnelly at HSBC, showing the similarities between today’s environment and 1968.

On September 3, Brent penned “Echoes of ’68,” a thought-provoking comparison of the years 1968 (remember that doozy?) and 2020. Did you know that ’68 included a global pandemic that killed 4 million, including 100,000 Americans? The similarities between the two years in the economy and markets are striking, too.

2020-09-13 – HSBC – Echoes of 68

Best to your week!

Stock Market Outlook entering the Week of September 6th = Uptrend

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

ANALYSIS
The stock market outlook remains in an uptrend, but last week’s sell-off did some damage, as the ADX flipped to a downtrend.

2020-09-06-SPX Trendline Analysis-Daily

The S&P500 ($SPX) sat ~14% above its 200-day moving average on Wednesday, which was finally enough to bring the sellers out.   The May to June trendline and the 34-day moving average appear to have held…at least for least week.  The average currently sits ~10% above the 200-day, so we’re still fairly extended based on historical performance.

The ADX flashed a bearish cross-over on Friday, moving this signal to a downtrend.  Price and volume action remains bullish, still showing a limited number of distribution days and remaining above the 50-day moving average.

2020-09-06-SPX Elliott Wave Analysis-Daily-IntermediateC

I’m still not confident in the Elliott Wave count, but I’m expecting another run at the all time high before the rally is over.  I placed the major retracement levels for the rally in the chart above, just in case the 5-wave is now complete (as I had been labeling this run-up previously).

If it was a 3 that just ended, then the sell-off should find additional support near 3279 (the end of the first wave in the summer uptrend and the 50-day moving average).  Otherwise, the 200-day moving average is in play, as well as the 38.2% retracement level.

2020-09-06-SPX Trendline Analysis-Weekly

In the weekly view, a negative RSI divergence shows up, which is why it’s possible for a 5th wave ending last week.  The megaphone pattern we discussed a few weeks back appears to have held, with the S&P barely breaching the upper-bound before falling lower.

COMMENTARY

While the “markets” may be surging higher, it has been on the backs of large technology companies. Amazon, Apple, Facebook, Google, and Microsoft are the 5 largest companies in the index, and account for almost a quarter of the S&P 500’s current market cap. Basically, 1% of the 500 companies in the index account for 25% of the combined “value” of all 500.

But market cap doesn’t really tell the whole story. Through the end of August, the total return for the S&P500 was ~9.7%. The weighted average return for the top 5 largest companies was ~15.6%. That means the weighted average return for the other 495 stocks in the index was…-5.8%. That’s right…down for the year (hat tip to CMG). And September is the weakest month, in terms of historical returns.

With prices near all time highs, an ADX cross-over, and a “mature” uptrend in Elliott Wave, it’s time to review your positions (sizing and performance). Play with house money (aka your profits) where you can, cut your losses where you can’t.

Short week ahead, as the U.S. exchanges are closed tomorrow for the Labor Day Holiday.

Best to your week!

Stock Market Outlook entering the Week of August 30th= Uptrend

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

ANALYSIS
The stock market outlook remains in an uptrend heading into the week, with bullish trends in place for the ADX, price/volume, and Elliott Wave.

2020-08-30-SPX Trendline Analysis-Daily

The S&P500 ($SPX) now sits ~12% above the 200-day; odds still favor sideways or downward price action near-term.  But the first technical support level would be the May to June trendline.

The ADX shows a strong bullish trend in place, and price/volume action has also been bullish.  The “correct” Elliott Wave count isn’t clear (to me at least).  I adjusted the wave labeling, but all I really know is that it hasn’t turned bearish yet, so it’s still risk on.

2020-08-30-SPX Elliott Wave Analysis-Daily-Intermediate C

Considering the current rally has retraced the entire downtrend and price is sitting at all time highs, it’s possible the S&P will reach a Fibonacci extension target before another correction.  For example:

• 114.6% of the prior downtrend = 1377 points = 3,568 (~2% from Friday’s close)
• 123.6% of the prior downtrend = 1485 points = 3,676 (~5% from Friday’s close)
• 132.8% of the prior downtrend = 1596 points = 3,787 (~8% from Friday’s close)
• 161.8% of the prior downtrend = 1944 points = 4,135 (~18% from Friday’s close)

The RSI may not be showing a divergence anymore, but now it’s extremely overbought; pick your poison.

COMMENTARY

Earnings season is wrapping up, with most companies reported better than expected earnings in Q2.  Definitely the right direction, but definitely not an all clear. You may have also heard that some heavyweights of the Dow Jones index (Exxon Mobil, Pfizer, and Raytheon) will be replaced September 1st by Amgen, Honeywell, and Salesforce.

More importantly, the Fed held their annual meeting in Jackson Hole, Wyoming, which included a major change in the way inflation will be viewed in the years ahead.

Basically, the Fed doesn’t want deflation. They’re so scared of it that they’re willing to let inflation run higher than their 2% target if inflation is below that target for too long…like it has been…for the past 10 years…despite the Fed’s use of record low interest rates and massive lending programs (the Fed can lend, but not spend…at least right now).

Near term, that probably won’t change much…interest rates and inflation have both been low for a while now.  And now we know rates won’t change even when we do finally see inflation.

This creates issues for investors and their asset allocation strategies.  Stocks will outperform with rates near zero, because they’re basically the only game in town if you want a return.  Investors have also piled into bonds, because any return is better than no return or a loss.  But when we eventually do see sustained inflation over and above the target, one or two quarter point rate hikes aren’t going to cut it.  And that’s going to shock the system.

Bonds lose value when rates rise…great for investors looking to buy, but not so good for those who need to sell.  Rising rates aren’t usually good for stocks because the cost of doing business (raw materials, corporate debt, wages, etc.) are higher.

From a personal finance perspective, this is a troubling development too.

Think back to a time when you got a “cost of living” raise at work;  this was meant to compensate for increased expenses due to inflation.  Rudy Havenstein tweeted “When you see the word ‘inflation,’ replace it with the phrase ‘the cost of living’ and see if you like what you hear”.  When we do finally see inflation, expect you’re expenses to increase more for a longer period time.

And +2% inflation is already here…it’s just not evenly distributed.  How you personally experience it is totally dependent on your expenses.  Have a lot of housing, health care, education, or energy expenses?  Then you know what I’m talking about.  Letting average inflation run higher than 2% will likely mean those expenses increase even more in the coming years!

And since the Fed calculates inflation based on a bunch of different expenses, that distribution is even more lumpy.  Let’s say the your meal/pet toy/clothes subscription box goes from 25 to 30 bucks a month (for example).  $5 may not seem like a big deal, but that’s 20% inflation!  At the same time, your new OLED TV probably goes from $799 to $749.  Average those two expenses together, and the net inflation is actually <1%; if those two expenses were the “basket of expenses” the Fed uses to calculate inflation, they would say that we need to continue with lower interest rates because we’re below target.

It’s not all bad though.  We all still have time to prepare, do research, make a plan. Some jobs will command much higher salaries.  You’ll actually be able to get a decent return from a savings account!  And all the money that central banks have and will unleash has to go somewhere.  Where will that money flow?  Bonds?  Gold?  Crypto?  TIPS?

Best to your week!

Stock Market Outlook entering the Week of August 23rd = Uptrend

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

ANALYSIS
No change in the stock market outlook; uptrend with green across the board (ADX, price/volume, or Elliott Wave).

2020-08-23-SPX Trendline Analysis-Daily

The S&P500 ($SPX) sits 10% above the 200-day; that’s historically extended, so odds favor sideways or downward price action from there. The first level of support is the May-June trendline.

2020-08-23-SPX Elliott Wave Analysis-Daily-Intermediate A

Since we’re basically at all time highs, there’s a lot of discussion regarding EW counts, with lots of different price targets thrown around (both bull and bear cases). The S&P reached an all time high of 3399.96 on Friday and exceeded the 3393 a few times during the week. All those excursions came on weaker RSI readings.

The price action isn’t convincing enough to say the current count is wrong, but enough to cast doubt on it for sure.  I’ve kept an alternate count, because I really think the June 8th high was the end of a 5th wave that completed Intermediate A.

2020-08-23-SPX Elliott Wave Analysis-Daily-Intermediate C

I honestly don’t know which EW count is correct…and most likely no one will until after we see the depth of the next correction.  But that’s also why I choose to use more than one signal.

In any case, what we do know, is that:

• The rally from the March low retraced 100% of the prior decline
• Since the last corrective wave in June, we can see 5 waves, even if everyone doesn’t agree on the price where each of the waves start and end
• When 5th waves end, it’s correction time

The good news is that the differences in the counts (Intermediate A vs C / Bull verses Bear market) don’t change the fact that we should see a correction soon. They just impact “how big” people think the next correction will be…what price targets they use for trading.

2020-08-23-SPX Trendline Analysis-Weekly

I haven’t shown the long-term view in while. You can see the negative divergence more clearly, in terms of RSI. And look at price action in 2019; the S&P sold off after recovering from a big decline and reaching the prior all-time high (set in the middle of 2018).

Still, that doesn’t mean the markets can’t go higher. I saw someone calling for the megaphone pattern to continue, which could see the S&P500 rise above 3500…before heading back below 2200!

COMMENTARY

Hitting all time highs on the S&P means that we’ve just experienced the fastest bear-market plunge, followed by the second-fastest bear-market recovery ever (in U.S. markets at least).  And in no way is the underlying economy anywhere close to as strong as is was pre-plunge.  May you live in interesting times indeed!

Many have asked why are stock prices so high, when the underlying economy is not so great.  Basically, it’s the only game in town if you’re looking for a return on your investment.  With interest rates essentially zero and the U.S. Federal Reserve buying bonds, there’s a lot of money looking for a home.  I’m talking about market makers like hedge funds, asset managers, institutional investors, corporations, etc…even countries (check out Swiss investments in US stocks).  They’ve got to put their money somewhere.  You and I are just along for the ride.

The current rally has been really kind to tech stocks and other COVID plays, so your allocations may be a little out of whack. It’s probably a good time to take some profits.

Best to your week!

Stock Market Outlook entering the Week of August 16th = Uptrend

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

ANALYSIS
Little change in price last week means the stock market outlook shows an uptrend in place this week.

2020-08-16-SPX Trendline Analysis-Daily

The S&P500 ($SPX) is oh so close to a new all time high, and is up ~3.5% for the year, believe it or not.  It’s also looking a bit extended from the 200-day moving average.  Not quite to the levels seen in Q1 of this year, but something to watch.  No change in the ADX or price/volume signals, though we did pick up a distribution day. The support trendline also remains in place.

2020-08-16-SPX Elliott Wave Analysis-Daily-Intermediate A

Elliott Wave is still a problem for this uptrend, and there was another negative divergence in the RSI last week as prices came within a few points of the all time high.

An Intermediate B wave typically retraces 50-79% of the Intermediate A wave. If the count and pattern holds, the target for the next downtrend somewhere between 2800 and 2400.

COMMENTARY
On the upside, U.S. retail sales were strong in July, and actually bested levels prior to the pandemic. But that improvement came with increased inflation, and negotiations for another aid package have stalled.

Given that we’re in a historically “weak” period for market prices, it wouldn’t be surprising to see a pull back over the next 2-3 weeks.

Best to your week!