Fear looms over the stock market as May jobs data is on tap. As predicted in last week’s newsletter, the market traded flat. But this week could be the first week of a decline in the S&P and NASDAQ as mega-cap tech stocks such as Nvidia start to fall.
Even though the market is closed on Thursday for Independence Day in the United States, pay careful attention to the technicals this week, because a lot of technical indicators are pointing to the market having possibly topped out last week. If the technicals hold, we could be facing a correction in the market over the next few weeks.
Also, be sure to read the end of this newsletter for Independence Day sales happening right now.
Last Week Recap
In last week’s newsletter, I said “I would not be surprised to see the markets trade flat this week, although some upward movement can’t be ruled out”. And that’s exactly what happened. The DOW, S&P 500, and NASDAQ all finished the week flat, down 0.05%, 0.05% and 0.06% respectively. The Russell 2000 was up slightly at +1.27% on the week. This kind of flat trading is expecting during a topping out cycle in the market.
Last week’s PCE inflation data came in-line with expectations, and the market reacted accordingly by pricing in higher for longer rates. Treasuries fell, although futures traders are still pricing in 2 rate cuts as compared to the Federal Reserve’s announced 1 rate cut. So there could still be more pain ahead once the markets price in what the Federal Reserve is saying they’re going to do.
Earnings last week weren’t good either, as most of the companies that reported last week saw their stock prices drop post-earnings. Nike was the hardest hit, with a fall of 20% in their share price post-earnings. Nike is now trading at a level not seen since the COVID pandemic crash in 2020, and it just had the lowest monthly close since May 2019. Consumers are struggling, and Nike’s stock is a clear sign of that.
Further, Nvidia, which has been the market leader all year, fell for the 2nd week in a row, and formed a doji candle last week. It’s another strong sign that Nvidia is ripe for a pull-back. Technical analysis shows NVDA could fall as low as $85 over the next few months, although it has strong support at $95. Long term, NVDA remains bullish, so any price under $100 would be a great dip-buying opportunity.
As always with market pullbacks (assuming we actually get one), these are opportunities to buy stocks at reasonable prices. Market pull-backs are times to get excited about buying at low prices, not times to get worried. Investors will need to keep their eye on the rising unemployment rate and falling GDP though, as these could indicate an upcoming recession, and possibly a larger sell-off in the stock market.
Market Sentiment
The CNN Fear and Greed Index (https://www.cnn.com/markets/fear-and-greed) remains in the Fear stage, although it rose slightly to 44 last week. While the stock market portion of the Fear and Greed index remains unchanged, options traders have become less fearful, which helped push the Fear and Greed index higher. This is most likely due to the fact that options decay over time, and during flat trading cycles like we’re currently in, options traders tend to sit out so as not to lose money to time decay. This leads to options traders appearing bullish, when in reality they’re just sitting on cash.
After rising for two weeks in a row, the VIX fell 5.7% to close at 12.44 last week. This keeps the VIX in bullish territory for now. Because the VIX is based upon options trades one month out however, it’s to be expected that options traders will sit out during flat weeks. This is another reason why the VIX may appear to be more bullish than options traders actually are. I would expected this cycle to continue for one more week through the Independence Day holiday, before we start to get accurate data again the week after next.
Technical Analysis
With the market trading mostly flat last week, and down slightly on Friday, the S&P 500 and NASDAQ both lost some bullishness last week. While the DOW and Russell 2000 are now both 100% bullish, the S&P 500 and NASDAQ are only 80% bullish. This indicates that tech stocks might be looking to sell-off this week, even if the broader market continues higher.
And with the jobs data coming out Friday, and the market closed for a federal holiday on Thursday, I would not be surprised to see the market continue to trade mostly flat to slightly up Monday through Wednesday, before seeing a fairly large move on Friday. Day traders might be best off trading on Monday and Friday only, and taking a 3 day break between Tuesday and Thursday.
With last week’s market trading flat, we formed doji candles on the DOW, S&P 500, and NASDAQ last week. Technically, a doji candle is a reversal candle, and this is another sign that the stock market is topping out, and will most likely start to fall either this week or next. Of course, doji candles are not 100% accurate, and that means there’s still a 40% chance the market could continue higher.
If the market reacts negatively towards Friday’s job report, that could be the nail in the coffin which triggers a broader market sell-off. I would personally like to see two red weeks in a row before getting confirmation however. The reason is because we also formed a doji candle on the S&P 500 back at the beginning of May, and while the market traded down the week after, it turned around and started to rally again after that. So I would like to see two red weeks in a row before having faith in a longer-term correction starting.
Economic News
With June now over, we’ll start to see some June economic data come out this week. And we get things started with the June jobs numbers. Wednesday we’ll get the ADP private payrolls numbers, and then Friday we’ll get the official jobs numbers. Economists are predicting a significant slowdown in job growth in June, although they’re predicting the unemployment rate will remain at 4%.
More concerning is that hourly wages are expected to remain at a 4% year-over-year increase, which means future inflation could rise well above 3% again as consumers’ spending power increases.
Of course the jobs numbers themselves are completely neutral. The markets reaction could be in either direction. The market could react bullishly to worse than expected jobs data as it expects the Fed to lower interest rates sooner rather than later, or the market could react bearishly to worse than expected jobs data as it expects an upcoming recession to hurt stocks. But with the market generally taking all news as bullish lately, I would put the odds of a Friday rally at around 70%.
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
The below calendar says it all. There are basically no earnings to worry about this week.
Crypto
Bitcoin is holding the $61,000 support level for now. This is a good dip buying opportunity in my mind. Bitcoin might fall as low as the next support level of $57,000, but it should not fall any further than that. If it does in fact fall below $57,000, investors can set a stop-loss at $56,000. Outside of possibly getting stopped out, the current price of Bitcoin appears to be a huge buying opportunity. While we are still another 3 to 6 months away from a historical rally in crypto, it’s unlikely Bitcoin will fall much further than the price it’s currently trading at.
Other Things to Know
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Wishing you the best of success trading this week,
Stock Curry