The Safe Investing Blog

Stock Market Outlook entering the Week of June 28th = Uptrend

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

ANALYSIS
The stock market outlook remains in an uptrend again this week, but is really just one down day away from a downtrend.

2020-06-28-SPX Trendline Analysis-Daily

A down week for the S&P ($SPX). Tuesday’s sell-off made short work of the April/May support line; new resistance lines are shown.

We’ll see if the 200-day moving average provides support this week, and the 50-day moving average isn’t far behind. If we see vertical violation of the 50-day (i.e. big price move below the average on high trading volume), this signal will also turn bearish.

The ADX Directional indicators cross-over again, back into bearish territory. Price/volume is still in an uptrend, but selling is elevated…at least the distribution days aren’t bunched together.

2020-06-28-SPX Elliott Wave Analysis-Daily-Intermediate A

For Elliott Wave, the rally I expected to see last week didn’t materialize, but the count hasn’t been invalidated…yet. It looks like we have an ABC 4-wave, with the 4th wave almost complete.  Since Wave 4 can’t overlap Wave 1, a move below 2955 invalidates this count.  Just like last week, the uptrend signal remains in place to start the week, but let price be your guide.

COMMENTARY
My original assumption was that the SPX would rally from the March low into April and May on all of the stimulus programs, as well as other general “improvements” relative to everything being shut down.

Then, as economies reopened and we experienced 2nd waves of COVID, prices would retreat. I assumed this would happen in May, but uncoordinated shutdowns and reopenings look to have drawn out the market impact (flattened the curve, so to speak).

The severity and duration of the second leg down will likely hinge on how much support the government provides. I can imagine scenarios where the U.S. FED starts purchasing index ETFs to stem a selloff!

Second quarter earnings are just around the corner. Since many companies stopped providing forward guidance, expect more volatility when announcements are released.  Also, I’ve seen some discussions about the impact of end of the quarter rebalancing, so stay sharp.

Best to your week!

Stock Market Outlook entering the Week of June 21st = Uptrend

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

ANALYSIS
The stock market outlook remains in an uptrend this week, but is the current rally running out of steam?

2020-06-21-SPX Trendline Analysis-Daily

The S&P ($SPX) rallied Monday and Tuesday, but price drifted lower afterwards. We briefly dipped below the upward trendline on Monday as well, but no enough to call it off.

The ADX Directional indicators crossed-over again, back into bullish territory, but the strength we saw two weeks back is gone. Institutional selling, in the form of distribution days, isn’t elevated yet, and price action in growth stocks remains strong. Friday’s massive volume was thanks, in part, to option expiration.

2020-06-21-SPX Elliott Wave Analysis-Daily-Intermediate A

For Elliott Wave, I checked other possible retracement levels, and found 85.4%…interestingly, it overlaps the recent high on June 8th. That kicked off several discussions about the current count, the lack of divergence in the RSI/MACD, etc.

The uptrend signal remains in place to start the week, but let price be your guide.  I’ve seen a bullish count that put price targets for a 5th wave above 3393 (which would invalidate the Primary A wave count), and bearish counts that already have the S&P in the next leg of a downtrend (which would invalidate the Intermediate A wave).

Near-term, watch the June 8th high and the the June 15th low.

COMMENTARY
The big news last week came from the U.S. Fed, as they announced plans to purchase individual corporate bonds (versus their ETF purchases thus far) to provide more liquidity to the credit markets.

The drawback?  The risk/reward relationship for bonds is screwed up.  The Fed isn’t buying because they bonds are a good investment.  They’re buying bonds precisely because those bonds are bad investments.

Yes, this does continue to support “zombie” companies, but at the moment, employment is the more important concern.  But at some point, there will be consequences, and those consequences will impact people who can least afford it (i.e. people who rely on fixed income investments).

Best to your week!

Stock Market Outlook entering the Week of June 14th = Uptrend

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

ANALYSIS
The stock market outlook remains in an uptrend this week, but market action turned a bit bearish last week.

2020-06-14-SPX Trendline Analysis-Daily

A big spike in volatility last week, stocks sold off hard.   The S&P500 ($SPX) found support at the 200-day moving average.  And the upward trendline between the April and May lows remains intact, which is a positive sign for the uptrend.

On the downside, the ADX Directional indicators cross-over, giving us a sell signal.  We also picked up 2 distribution days.

2020-06-14-SPX Elliott Wave Analysis-Daily-IntermediateA

The sell-off also changed the Elliott Wave count a bit.  One issue with the counts over the past two weeks was the RSI reading.  It’s really high, and didn’t show any divergence (higher high price with a lower RSI than the previous high price).  Such a strong RSI is typical of a 3rd wave, not a 5th wave.  So that reduces the probability of a completed a pattern.  That would move us away from the possibility that the S&P completed a minor 5th wave, an intermediate  C-Wave, or a Primary B-Wave.

Instead, we’re left with a higher probability that the S&P is still in an Intermediate A-wave (the 4th wave to be specific).  With that count, we should see a 5th wave head back towards the June high, but with a lower RSI level, which seems likely given the current set-up.

Last week’s caveat bears repeating:

If we get back to 3393, then we’ll have to re-evaluate the Feb-Mar decline.  Some are already relabeling that decline as the entire downtrend, with the bull market back in full swing.

COMMENTARY
Sorry for mentioning you should book some profits last week!  We were overdue for a pullback, and the volatility shouldn’t be surprising at this point.

Hertz…what the hell is going on?  The company is filing for bankruptcy.  That, in and of itself, should keep 100% of investors away from the stock.  If you’re a speculator or a gambler, by all means.

I heard some say that Hertz is still in business, so it’s stock will come back.  Yes and no.  Yes, there will likely be stock in a company called Hertz after the bankruptcy.  No, the shares on the market now are not shares in the new company, and there will not be any type of “conversion” or swap.

Remember what a stock represents:  equity.  You’re buying a share of the company’s financial value AFTER all debts are paid.  A firm files for bankruptcy when it can’t pay it’s debts.

A similar situation occurred in 2008 when GM filed for bankruptcy.  People piled into their “old” shares, thinking they would get cheap shares of the new company.  Wrong.  The “old” GM couldn’t creditors in full (i.e. people who hold corporate debt, bonds, etc.).  Since no equity remained, the stock was worth $0.00.  The old “GM” was closed down, and a new “GM” was created, with shares in the “new”company issued during an IPO.

This time is a bit different (worse actually) because Hertz has plans to hold a stock offering, in the old company, while it is filing bankruptcy!  This is crazy!  Even the disclosure documents say that the new stock will “ultimately be worthless.” (H/T Peter Boockvar via John Mauldin).

Trading is not investing…it’s a necessary part, but just a part.  If you do decide to speculate, position sizing and stop losses are a must.  Don’t let one trade wipe you out or add years to your financial goals.

Best to your week!

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

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

ANALYSIS
The stock market outlook remains in an uptrend this week, with all three signals showing green.

2020-06-07-SPX Trendline Analysis-Daily

Stocks were on fire last week.  The S&P500 ($SPX) sits ~11% above the 50-day moving average, and ~6% above the 200 day moving average. For some perspective, the S&P was just 1.5% above the 200 day moving average last week!

The bullish trend shown by the ADX is strengthening.  And price/volume action remains positive, with no sign of heavy selling recently.

The market made also swift work of last week’s update to Elliott Wave, blasting past 3041 and invalidating the count I was showing, not to mention several others.

2020-06-07-SPX Elliott Wave Analysis-Daily- Intermediate C

It looks like the S&P  either:

1. completed an irregular B wave at the May low, and is in the middle of the C wave.
2. Or, we’re still in the A wave

2020-06-07-SPX Elliott Wave Analysis-Daily-Intermediate A

Both these scenarios remain valid until we reach all time highs. If we get back to 3393, then we’ll have to re-evaluate the Feb-Mar decline.  Some are already relabeling that decline as the entire downtrend, with the bull market back in full swing.

COMMENTARY
On the back last week’s cautionary post, U.S. stocks rallied. Hard.  It’s amazing what Fed-backed markets can do!  And a completely surprising jobs report doesn’t hurt either.  According to the U.S. Labor Department, the economy gained ~2.5 million jobs in May, and the unemployment rate fell to 13.3%.

It’s hard to believe, but the S&P 500 is just about even for the year!  That said, not every sector has recovered equally.  There was a lot of “bottom-fishing” last week, with sectors like airlines outperforming stronger names.

The S&P is now 45% above the March low, so odds are you have some nice gains if entered new positions in the month of April when the new uptrend started.  If you’ve hit your targets, don’t get greedy…ring the register and lock-in some of your gains.

Best to your week!

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

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

ANALYSIS
The stock market outlook remains in an uptrend to start off June.  The ADX and price/volume are both in an uptrend, and Elliott Wave showing a “downtrend”.

2020-05-31-SPX Trendline Analysis-Daily

The S&P500 ($SPX) sits just about 10% above the 50-day moving average, and just abaove the 200 day moving average. The ADX is still showing a weak trend, but we have seen several days of accumulation recently.

2020-05-31-SPX Elliott Wave Analysis-Daily

Elliott Wave shows the S&P500 remains in a corrective pattern (an expanded flat), with the May low as Minor A. Targets for completing Minor B were between 2999 and 3017, and the S&P hit 3068 on Thursday (shown below). If this is the case, targets for Minor C would be between 1.618 of Minor A and 1.618 of Minor B…both of which happen to be 2580.

2020-05-31-SPX Elliott Wave Analysis-Daily-Minor B

Of course, we can’t predict what the stock market will do; a price above 3071 this week and we’ll need to adjust the pattern and targets. It’s also possible for a double of triple three pattern to emerge, which would stretch out the Intermediate B wave over the summer.

COMMENTARY
Stocks performed well last week.  The European Commission proposed a €750 billion recovery fund..it still needs to be approved by all EU members, which is no small task.  Closer to home, U.S. GDP is forecast to decline ~40% in the second quarter (on an annual basis).  That’s the largest quarterly decline since the Great Depression!

In Steve Blumenthal’s “Trade Signals / On My Radar” post this week, he summarized  Lacy Hunt’s presentation from the Strategic Investment Conference. I found the insights on stimulus spending interesting.

Basically, all the stimulus (aka debt) that we’ve taken on is merely for survival, not for productive uses.  It’s an attempt to fill the gap in production while the economy was shut down. As our economies reopen, we’ll have to see how much of that gap we can fill without help from the Fed.

And filling that gap is not guaranteed.  Consumer spending accounts for almost 66% of economic growth in the U.S.  So any recovery will be linked to “healthy” consumers (financially, physically, and behaviorally).

• Will you feel financially secure enough to take out a loan for a car or a house?
• Will banks feel comfortable enough to lend to you?  And at what interest rate?
• Will you feel financially and physically safe enough to go to restaurants, take the subway, grab an Uber/Lyft, or go to a football game?  As often as you did last year?
• Will businesses feel secure enough to take out new loans to expand?  Or will they focus on paying off debt?

All these questions must be answered for Wall Street and Main Street to discover the new “normal”.  This week’s step in that journey is the May jobs report, which comes out Friday!

Steve followed that up with some truly amazing stats on S&P500 performance.  Since 12-31-2014, the market capitalized performance of S&P stocks is as follows:

• S&P 500 is up ~45%
• FANG stocks are up ~400% (Facebook, Amazon, Netflix, and Google/Alphabet)
• S&P 500 Index w/o FANG stocks is up ~35%

Based on those percentages, if you invested $10,000 in at that time, today you’d have:

• $13,512 (S&P w/o FANG)
• $14,531 (S&P 500)
• $40,390 (just FANG)

Steve goes on to say:

The point here is that just four stocks are driving returns of the major indices – especially the cap weighted indices. At the end of April 2020, FANG stocks represented 16.38% of the S&P 500 Index (cap weighted index). Add in Microsoft and Apple and together the FANMAG stocks represent 21.38% of the index. It is the large over-concentration in just a few names that is cause for concern.

This is another reason that the “stock market” seems disconnected from all the chaos that we read in the news.  As long as FANMAG stocks perform well, under performance in other areas is muted.  On the flip side, selling in these names will also have a disproportionate effect on S&P500 performance.  Something to keep in mind as you evaluate your holdings.

Best to your week!

Stock Market Outlook entering the Week of May 24th = Uptrend

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

ANALYSIS
The stock market outlook flipped to an uptrend last week (Monday) with another change in the ADX signal. Price/volume remained in an uptrend, while the Elliott Wave downtrend remains in place…it’s just a REALLY shallow one.

2020-05-24-SPX Trendline Analysis-Daily

The S&P500 ($SPX) sits ~8% above the 50-day moving average, and just below the 200-day moving average (~3,000). The directional indicators flipped again, but the overall ADX still shows a VERY weak trend, as it has been for the entire month.

The downward trendline fell to last Monday’s strong advance, so there’s a new uptrend traced off the recent lows.  But prices didn’t make much progress the rest of the week.

2020-05-24-SPX Elliott Wave Analysis-Daily

For Elliott Wave, the S&P500 has been working through an intermediate B wave for all of May.  A B-wave is expected to retrace a lot of the A-wave.  So far, that hasn’t really happened.  I’ve seen three potential counts:

1. B-wave completed on May 14th
2. B-wave is ~halfway complete
3. B-wave is just getting started

Scenario 1 would mean a new uptrend (C-wave), with the first level of resistance near the 3140 price level (79% retracement).  Scenarios 2 and 3 mean the S&P could start the next leg of the downtrend at any time…maybe hit ~3,000 first (coincidentally the 200 day moving average).  Odds favor the B-wave is still in place, so this signal is still in a downtrend for now.

COMMENTARY
Stocks jumped on reopening activities and positive news related to COVID19 vaccine trials.  Not to be outdone, the U.S. Senate grabbed headlines by introducing a bill that could require Chinese companies to delist from U.S. stock exchanges.

The Strategic Investment Conference wrapped up last week, and the final sessions did not disappoint.  I’ve got a lot of listening/watching to do; so much information!  If even half of the opinions turn out to be true, we’re in for a very interesting period in history!

Short week coming up, with U.S. exchanges closed for Memorial Day.

Best to your week!

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

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

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

2020-05-17-SPX Trendline Analysis-Daily

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

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

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

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

2020-05-17-SPX Trendline Analysis-Weekly

Let’s see…what happened last week:

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

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

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

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

– David Rosenberg

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

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

Best to your week!