Warning! The stock market is showing signs that the distribution stage has started. This as PCE inflation data looms. Distribution is when a stock, or in this case the stock market, tops out before starting a sell-off. During the distribution stage, volatility rises, and we see multiple major swings in prices, both up and down. This is the stage where buyers and sellers fight for control. It’s the last fight before bulls lose control to the bears and stock prices start to fall.
Last Week Recap
After a massive rally over the past few weeks, Nvidia fell 3.5% on Thursday, and another 3.2% on Friday. This is a clear sign that buyers are getting exhausted, and bears are starting to take over. The fight isn’t over yet though, as the distribution stage can last for weeks. Eventually though, if bears are successful in taking over, Nvidia’s fall could singlehandedly bring down the entire stock market, since its rise singlehandedly brought up the entire stock market.
Despite Nvidia’s fall on Thursday and Friday however, all 4 major indices finished the week in the green. The DOW rose 1.5%, the S&P 500 rose 0.6%, the NASDAQ rose 0.2%, and the Russell 2000 rose 0.8%. The rise wasn’t spectacular though, and this is to be expected. During a distribution stage, stocks typically trade fairly flat, although daily moves can be extreme in either direction. This makes for some great day trading setups, but is very risky for swing traders.
We also saw bullish momentum around Fed rate cut hopes start to fade as Fed members last week reiterated the likelihood of only 1 rate cut this year. And in an unexpected u-turn, the market actually fell on softer than expected retail data last week. All year, we’ve seen the market rise on bad economic news as investors bought up stocks on hopes for Fed rate cuts. But now investors appear to be more worried about a possible recession than excited about a possible rate cut.
Market Sentiment
The CNN Fear and Greed Index (https://www.cnn.com/markets/fear-and-greed) closed fairly flat last week, rising only 3 points, and remaining in Fear. All parts of the Fear and Greed index remain unchanged also.
The VIX rose another 4.2% last week, for the 2nd weekly increase in a row. The VIX is still showing long term bullishness though, as the VIX closed the week at 13.2, below the 15 level for Neutral, and well below the 20 level for bearishness. Although this is a sign that volatility is increasing, the fact that the VIX remains below 15, and especially below 20, means the market is just now entering the distribution stage, and bulls are still in control for now.
Technical Analysis
The daily technicals remain 100% bullish on the S&P 500 and NASDAQ, and now the DOW has joined the party and turned 100% bullish as well. Only the Russell 2000 remains bearish, and it unfortunately remains very bearish. After seeing Nvidia fall on Thursday and Friday, I would not be surprised to see the markets trade flat this week, although some upward movement can’t be ruled out due to the technical bullishness in the market.
I think the VIX is in agreement with the daily market technicals indicating mild bullishness, but be aware that with volatility increasing, the market could move up or down 1% or more on any given day. Don’t get too excited about a rise, or too worried about a fall. The overall market direction should pan out slightly up to flat by the end of the week.
The weekly technicals remain mixed, although last week’s rise in the DOW did help to turn the market mostly bullish among the mega-cap and large-cap stocks, despite small-cap stocks continuing to struggle. While the S&P 500 and NASDAQ are 100% bullish, the DOW is mixed, and the Russell 2000 is bearish. Overall, there’s no clear direction up or down for the overall market, and this is another reason why I believe we are entering a distribution stage.
The NASDAQ also formed a doji candle last week, which is often the sign of a reversal. If it holds, we could see the NASDAQ fall first, bringing down the S&P 500 with it.
Economic News
This week’s big economic news is the PCE inflation data coming out on Friday. When Jerome Powell gave his press conference at the FOMC meeting, he said he needed to see core PCE inflation get close to 2% before he would consider cutting rates. Core PCE came in at 2.8% previously, and is forecast to come in at 2.6% this time. Right now, futures traders are still betting on a rate cut in September. But should core PCE come in higher than expected, we will most likely see those rate cut expectations fall. That said, if the Fed really does do only 1 rate cut this year, it might not happen until December, even if we do see PCE drop on Friday.
There are a lot of Fed members speaking this week, although most will be speaking prior to Friday’s PCE inflation data being released. If the consensus is still for only 1 rate cut, and for that rate cut to come later than expected, we can expect the market to fall as it re-prices in higher rates for longer.
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
Despite only a few companies reporting this week, there is a major one on Friday, and that is Nike. Nike usually has a pretty big impact on the market, although this time around, Nike’s impact might get overshadowed by the PCE inflation data.
Crypto
Bitcoin continues to fall, and has now broken below the 100 day EMA. This is extremely bearish. We’ll have to see if Bitcoin can hold the next support level of $61,000, and especially $57,000. If it breaks below both of those, it will most likely fall much further. On the other hand, both levels would be great dip-buying opportunities, as the current environment makes it likely that Bitcoin will bounce and go higher. Stop losses can be placed at $56,000 in case the technicals break down.