The similarities between 1987 and today are scary. This week’s FOMC meeting could make or break the stock market. Investors continue to ignore the warning signs, including the economic slowdown, rising inflation, and the possibility for more interest rate hikes. If investors decide to wake up during this week’s FOMC meeting, we could see another stock market crash like we saw in 1987. I explained the similarities between 1987 and today in this video: https://www.youtube.com/watch?v=4KgwRHUpnYs&list=UULFxFRGG-_23Kqxe0YexDc1eg.
Last Week Recap
The stock market rallied last week as earnings from Alphabet and Microsoft came in better than expected. And despite a huge miss from Tesla, that stock rallied as well as Elon Musk hinted at a cheaper EV being released by the end of this year.
The stock market is ultimately priced based upon earnings. But as forward price to earnings ratios hit the highest levels since the 2001 dot-com bubble, are investors ignoring the economic warning signs of an upcoming recession? Last week, Q1 GDP was released, and it came in much lower than expected at a mere 1.6%. PCE inflation also came in higher than expected, with core PCE coming in at 2.5%. And consumer spending also slowed down more than expected, coming in at only 2.5% vs 3.0% expected.
Last week the market ignored the economic warning signs as investors bought up stocks on good earnings. The question now is, will companies be able to continue to report good earnings despite the economic slowdown, or will earnings growth slow down just like it has during every other period of economic slowdown in history?
Market Sentiment
After last week’s rally, the CNN Fear and Greed Index (https://www.cnn.com/markets/fear-and-greed) rose to 42 from 31 the prior week. But this still keeps the Fear and Greed index in Fear territory. While market momentum rebounded slightly, stock price strength got worse. This means the rally last week was very narrow, limited to just a few stocks. While that does indicate a healthy rally, it is possible for the market indices to go higher on just a few stocks rising, even if most stocks in the market fall. We saw this happen at the end of 2023, and we could see it happen again.
While options traders were trading in extreme fear two weeks ago, last week they let off the brakes and returned to Neutral. But this week’s FOMC meeting could change things in an instant. I would expect the number of put options being purchased to rise going into Wednesday’s FOMC meeting, but what happens after that will depend upon what Jerome Powell says.
With last week’s rally, the VIX fell a massive 20%, finishing the week at 15.03. While that keeps the VIX in the neutral stage, it was not enough of a fall to indicate bullishness from options traders. More than likely, last week’s rally was just a relief rally from the fall over the prior two weeks. We are most likely going to see a continued decline in stocks based upon market sentiment.
Technical Analysis
The daily technicals showed some relief last week, but failed to turn bullish. While the candles on the S&P 500, NASDAQ, and Russell 2000 all closed above the 21 day EMA, none of them closed above the 10 day EMA. And the DOW candle is still below both the 10 and 21 day EMAs. The RSI and MACD are pretty much neutral on all 4 major indices. So the daily techncials are now neutral, lining up with market sentiment.
Last week’s rally did not change the weekly technicals. The candles stayed above the 21 week EMAs, but below the 10 week EMAs. The MACD remains bearish on all 4 weekly indexes as well. Despite the daily charts turning neutral, the weekly charts remain bearish. This is a further indication that last week’s rally may have been more of a relief rally, rather than an indication that the fall over the prior two weeks has bottomed out. We may be seeing a classic bull trap here.
Economic News
This week is jam packed with economic news, the biggest of which is the FOMC meeting on Wednesday. I strongly recommend reviewing the calendar linked below to know what time everything is being released.
Especially watch out for the April Consumer Confidence index being released Tuesday at 10am Eastern. Also watch out for the April private payroll data being released Wednesday before the market opens, as well as a slew of data being released at 10am Eastern on Wednesday.
Then at 2pm Eastern on Wednesday we’ll get the FOMC statement, followed by Jerome Powell’s press conference at 2:30pm Eastern.
The data continues on Thursday with US trade deficit and US productivity numbers. Then on Friday we get the official US jobs data for April, as well as the ISM services index.
Here’s the full list of all of the economic news coming out this week as well as the time each report is being released: https://www.marketwatch.com/economy-politics/calendar
Here’s what time each Fed member is speaking this week: https://www.federalreserve.gov/newsevents/calendar.htm
Earnings
Earnings season continues this week with more major companies reporting, including Amazon and Apple. We kick things off on Monday with Sofi. Then on Tuesday we get earnings from PayPal, Lilly, Amazon, and AMD. Wednesday Pfizer reports. Then Thursday is another big day with Apple, Coinbase, Block, DraftKings, and Cloudflare all reporting after the bell.
Crypto
Bitcoin is struggling to rise, but this is typical post-halving. We normally see a slight sell-off in Bitcoin after halvings as people take profits. The profit taking usually ends 3 to 6 months after the halving, and then anywhere from 9 to 12 months post-halving we typically see a major rally in crypto. This is a good time to buy the dip on your favorite crypto before the next rally starts.
Other Things to Know
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Wishing you the best of success trading this week,
Stock Curry