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Last Week Recap
Over the past two weeks, the stock market has absolutely rallied. And while some bulls think this is the start of another bull run, bears are afraid it’s nothing more than a bull trap. The stock market rallied last week as short term economic data came in indicating the economy is stronger than expected. But that data was revised downward last week, with the number of jobs created over the past year being revised down by 818,000 – the largest downward revision since the 2008 Great Financial Crisis.
The market also rallied on hopes of rate cuts, but those hopes are based upon the economy entering a recession. Historically, the stock market always tops out within 3 months of the Federal Reserve doing their first rate cut. With the first rate cut expected next month, the stock market should either have already topped out, or be close to topping out. And with September historically being the worst month of the year for the stock market, bulls shouldn’t be celebrating yet.
Most concerning is the fact that last week’s rally lines up perfectly with the 2008 bull trap, leaving the NASDAQ on pace to fall just like in did in 2008.
Market Sentiment
Despite the massive rally over the past two weeks, the CNN Fear and Greed Index (https://www.cnn.com/markets/fear-and-greed) finished at Neutral. Yes, market momentum was back to Extreme Greed, but stock price strength was still in Fear. In short, the majority of the rally over the past two weeks was in the mega-cap tech stocks. While a lot of stocks rose last week, they didn’t hit new 52 week highs. The rally was good, but not great. And the bond market continues to be in extreme fear, indicating stock market investors might be a little bit too bullish.
The VIX fell significantly over the past two weeks, but still only finished in Neutral. The rally over the past two weeks wasn’t enough to push the VIX into bullish territory. It looks like options traders are still expecting a possible drop in the market, further pushing the bull trap narrative.
Technical Analysis
The rally over the past two weeks flipped the markets from 100% bearish to 100% bullish. Just like the market appeared oversold two weeks ago, it now appears slightly overbought. The DOW and S&P are both near all time highs, while the NASDAQ bounced off of the 161.8% Fibonacci Retracement level from the 2022 bear market. All of these levels are resistance levels that could cause the rally to stall.
It should be noted that the candles on the DOW are significantly more bullish than they are on the S&P and NASDAQ, so we could see the DOW continue to rise this week, even if we see the S&P and NASDAQ fall.
The Russell 2000 is also 100% bullish, but Friday’s rally appears to be a bit overdone, and could cause problems this week. Like the DOW however, the candles are quite bullish, and we could also see the Russell 2000 rise this week, regardless of what the rest of the stock market does.
The weekly technicals are are mostly bullish, but not 100%. A few weeks ago they were fairly bearish, and now they’re mostly bullish. The MACD on the DOW and S&P 500 are both still bearish, and that is the hiccup. The RSI is approaching overbought on the DOW and S&P 500, but isn’t quite there yet. The weekly charts in general are indicating a continuation to the rally over the past two weeks.
While I do think the rally over the past two weeks was a bull trap, the weekly charts say I’m wrong, and the rally will continue. The weekly technicals are the strongest support for a continued bull run. So I wouldn’t just dump all of my money into puts expecting the market to follow 2008 exactly and selloff this week, because based upon the technicals, this rally will continue.
Economic News
While there isn’t any major economic news coming out this week that is expected to significantly move the markets, a consensus among all of the minor reports could collectively move the market significantly up or down. If the economic news is better than expected, we can expect stocks to rise. If the economic news is worse than expected, we can expect stocks to fall. Unlike over the past two years, bad news is bad again and good news is good again.
There are two economic reports that might have a slightly larger impact than the rest. The first is the Q2 GDP revision on Thursday, and the 2nd is the PCE inflation data for July on Friday.
We also have Federal Reserve members speaking this week, so listen carefully for hints as to whether we’ll get 1 or 2 rate cuts next month.
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 is still underway, and the biggest earnings of them all is happening this week. Wednesday after the bell, Nvidia is reporting earnings. This will have a significant impact on the market on Thursday and Friday. So far earnings haven’t been great. Nvidia has been rising on hopes it will be an outlier and restore faith in the AI sector. But if those hopes are destroyed, we can expect a significant selloff in stocks on Thursday and Friday.
Crypto
While crypto missed out on the stock rally over the past two weeks, it finally picked up on Friday. The charts are bullish, and it looks like Bitcoin wants to continue to rise. There might be a slight pull-back to $61,000, but Bitcoin looks to go back up to $69,000 after that. If it does, it will have formed a W shaped pattern, which is very bullish, and sets Bitcoin up for a massive rally to new all time highs. I would be buying Bitcoin on any pull-back to $63,000 or below, and setting a stop-loss at $57,500.
Other Things to Know
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Wishing you the best of success trading this week,
Stock Curry