This is a huge week for the markets, full of a large amount of economic reports, including inflation data, as well as Fed speakers every day this week. On top of that, earnings season continues with the largest retail stores reporting, which will have a significant impact on the DOW and S&P 500.
Last Week Recap
The stock market went on a massive rally last week, with the DOW notching it’s 8th day in a row green, and coming within just a few points of a new all time high. The S&P 500 and NASDAQ are also close to new all time highs after last week’s rally, although the Russell 2000 continues to lag behind. The rally was mostly spurred by renewed hopes of a Fed rate cut after Jerome Powell came out dovish.
Unfortunately these rate cut hopes are no longer based upon inflation falling back down to 2% and the economy achieving a soft landing. Instead, rate cut hopes are now based upon the economy slowing down and the unemployment rate rising. While rate cuts are good for stocks, a recession is not. And last week’s economic data showed a significant slowdown in consumer spending.
The slowing economy also showed upon in companies’ forward guidance during earnings. Multiple stocks last week beat earnings expectations, but saw their stock prices fall after they gave lower than expected forward guidance. Banks, AI companies, and retail companies all expected the economy to slow down in Q2 this year, and all expected revenues to continue to decline. So far companies have been able to keep profits propped up by doing layoffs, but those no longer appear to be enough.
And all of the layoffs companies have been doing have sent the unemployment rate higher, with the unemployment rate now approaching 4%, and the number of full time jobs continuing to decline – now posting 3 straight months of declines. Unemployment claims last week came in much higher than expected, showing the problem is getting worse, not better. And that is what now has Jerome Powell so worried, and why he’s suddenly become dovish.
But the stock market reaction to all of this economic slowdown might surprise you. Historically, stocks continue to rise until the Federal Reserve does their first rate cut. On the day the Federal Reserve does their first rate cut however, stocks top out and usually fall into either correction territory or a bear market. The reason is because the Federal Reserve will only cut rates once the economy gets so bad that they are forced to in order to prevent a major recession. And that tends to spook investors.
So the rally in stocks last week should not have been unexpected. The market will most likely continue to be bullish until the Fed cuts rates.
Market Sentiment
While last week’s rally did cause the CNN Fear and Greed Index (https://www.cnn.com/markets/fear-and-greed) to rise, it didn’t rise as much as you would think. Despite the market approaching a new all time high, the Fear and Greed Index is only at Neutral. That’s because despite the indexes rising back into the Greed stage, Stock Price Strength remains in Extreme Fear. This means that only a few stocks are rising, while most stocks continue to struggle. Just like we saw in late 2022 and early 2023, the market is rising because the mega-cap stocks are rising. Most of the stocks in the stock market continue to struggle though.
The VIX fell another 7% last week, and is approaching lows not seen since before the COVID pandemic. While the Fear and Greed Index is Neutral, the VIX is Extremely Bullish. The VIX is a good indicator that the stock market will most likely continue to rise and reach new all time highs soon, possibly as early as this week.
Technical Analysis
The daily technicals continue to be 100% bullish. And while the DOW is a little over-extended, there aren’t a lot of indicators that the market is over-bought yet. The RSI is still below 70 on all 4 major indices. The only concern I have is that the daily candles are significantly above the 10 day EMAs. While this doesn’t necessarily indicate the market will drop, we could see some flat days where the market consolidates before continuing higher.
If the market does drop to fill the gap, the DOW would have to fall about 1.6%, the S&P 500 would have to fall 1.3%, and the NASDAQ would have to fall 1.3% in order to close the gap between the candle and the 10 day EMA. Keep in mind, this might not be a daily drop of this amount, it could be an intra-day drop. The gap could also get fixed through a combination of a slight drop in the market and consolidation, which will naturally bring the 10 day EMA higher over time.
After last week’s rally, the weekly charts are still mixed. While the candles are solidly in bullish territory, and the RSI is well above the neutral level of 50, the MACD has not yet formed a golden cross. This sometimes happens when we get a sudden move in the market, but the trend isn’t long enough to move the MACD.
This could either mean that last week’s rally was short-lived and will reverse, or it could mean that we just need to give the MACD time to catch up, which will happen if the market can continue to rise for each of the next 3 weeks.
On one hand, the market usually doesn’t top out until the Fed cuts interest rates. On the other hand, the market historically sells off in the last week of May once the major earnings have been reported. So we could see some volatility over the next few weeks, and trying to predict what will happen at the end of May and into June is very uncertain.
This week still looks bullish / neutral, and long term through September or so when the Fed cuts rates looks bullish, but a sell-off in the last week of May wouldn’t surprise me.
Economic News
This week is jam packed with a large amount of economic news as well as a daily Fed speakers. The biggest economic news will come Tuesday and Wednesday when the Producer Price Index (PPI) and Consumer Price Index (CPI) inflation reports are released.
In addition to the inflation data for April, there are also a lot of smaller economic reports being released this week. Wednesday sees US retail sales data, homebuilder confidence index, and business inventories data being released. Thursday we get housing starts, import prices, industrial production, and the manufacturing survey. Then Friday, we get the US leading economic indicators.
If that wasn’t all, we have Fed members speaking every day this week. So make sure to look at the economic calendar and Fed speaker schedules below, because this is going to be a very volatile week for the markets.
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 with major retail companies reporting. This is going to have a significant impact on both the DOW and S&P 500. Tuesday before the open, we have Alibaba and Home Depot reporting. Then Wednesday after the close we have Cisco reporting. And finally Thursday before the open we have Walmart, Baidu, and JD.com. We’ve already seen consumer spending start to decline, so it’ll be interesting to see how these retail companies report earnings, and especially what their forward guidance will be.
Crypto
Bitcoin is still technically in a down trend, although it does appear to be flattening out. Another re-test of $57,000 on Bitcoin would not surprise me. Whether Bitcoin bounces at that point or continues to go lower is yet to be seen. Historically Bitcoin trades flat and slightly down for about 6 to 9 months post-halving, and then starts to go on a major rally after that. So we’re probably still facing about another 6 months of neutral or slightly bearish action on Bitcoin before we see it start to take off again.
Other Things to Know
My new book has just been released! This is the ultimate trading journal, designed to help you become a more profitable trader. The book is available on my website at https://weprofit.io/books.
Multiple trading platforms continue to offer free stocks and high yields on cash. So get your free stocks while you still can at https://weprofit.io/platforms/.
To get this newsletter delivered to your email for free each week, add your email to the list here: https://weprofit.io/newsletter.
And if you haven’t already signed up for my free giveaways, you can do so by clicking the purple button at the bottom of https://weprofit.io/.
Wishing you the best of success trading this week,
Stock Curry