The stock market rally resumed last week, but the Federal Reserve could derail everything this week. With light economic news this week, the Federal Reserve’s 10+ speeches will have the biggest market impact intra-day, while earnings will have the biggest market impact during the extended sessions. And because the technicals turned bullish, but market sentiment remains bearish, news events will determine the direction of the stock market this week.
Last Week Recap
The stock market swung wildly between bullish and bearish last week. The week started out extremely bearish after much lower than expected economic data showed a significant slowdown in the economy. Q1 GDP came in much lower than expected, while the unemployment rate rose much higher than expected. This led to fears of stagflation setting in, while hotter than expected inflation led to fears that the Federal Reserve would raise interest rates again.
But the market flipped on Wednesday when the Federal Reserve came out and shocked everybody with their extremely dovish stance. Not only did Jerome Powell completely eliminate the possibility for more rate hikes, he ensured everybody that the Federal Reserve was still looking to cut rates. On top of that, the Fed decided to slow down the pace of quantitative tightening. This had the effect of causing long term interest rates to fall, and caused the stock market to rally.
But investors should be aware of the reasons why the Federal Reserve was so dovish. The Fed warned that the labor market is slowing down and economic growth was slowing also. For each of the past 3 months, the number of full time jobs has shrunk, and the unemployment rate is rising. There’s no question the US is facing a possible recession, if we’re not already in one. And those fears seemed to outweigh the Fed’s concerns about inflation, thus leading to the dovish stance.
Investors should know that historically, when the Federal Reserve cuts interest rates, this always marks the top of the stock market, and the stock market always falls as the Federal Reserve is cutting interest rates. The reason for this is because the Federal Reserve only cuts interest rates when there’s an economic slowdown or recession. And recessions are bad for stocks. And that’s why the stock market sells off when the Federal Reserve cuts interest rates.
For now though, Q1 earnings, while slower than Q4, are coming in better than expected in most cases. Stocks by and large haven’t really rallied a lot though, as forward guidance has come in weak, as CEOs and CFOs forecast an upcoming slowdown in the economy. Apple did cause a stock market rally on Friday, but that wasn’t because of great earnings. Earnings were actually pretty bad. Apple rallied because they announced the largest stock buyback in the history of the stock market.
Market Sentiment
Despite the rally on Thursday and Friday, the sell-off Monday through Wednesday kept the CNN Fear and Greed Index (https://www.cnn.com/markets/fear-and-greed) down. The Fear and Greed Index fell to 40 from 42 the week prior. This keeps the index in the Fear stage. Market momentum did improve a little, and the rise in the S&P 500 was enough to push market momentum back to bullishness.
But Stock Price Strength and Stock Price Breadth remain in Extreme Fear and Fear respectively. This shows that the rally on Thursday and Friday was narrow, and it shows that most stocks fell, and only a few stocks rose. Mostly, it was the mega-cap tech stocks that rose on Friday, which was enough to push the market indexes higher, even though most stocks continued to fall on Friday.
After the market breathed a sign of relief when the Federal Reserve came out dovish on Wednesday, the VIX fell. The VIX finished the week down 10%, closing at 13.49. This pushed the VIX back to bullish territory, and that is confirmed by technical analysis.
Technical Analysis
The daily technicals have turned bullish on all 4 major indices. This was entirely due to the rally in stocks on Friday. Historically, stocks will continue to rally up until the Federal Reserve cuts interest rates, and they’re not expected to do so until September at the earliest. So assuming the rally continues, Fibonacci Extension analysis shows that over the next 4 to 6 months before the Fed cuts rates, the DOW could rise 10%, the S&P 500 could rise 6%, the NASDAQ could rise 14%, and the Russell 2000 could rise 43%.
We’ll just have to watch out for the historical “Sell in May and Go Away” sell-off that usually starts in the last week of May once most of the large cap stocks have reported earnings. But for now, the technicals are bullish, and we should at least see a continued rally for the next 2 weeks.
Some technical analysts might notice the doji candle that formed on Friday though, which is typically a reversal candle. But keep in mind that dojis usually only signal reversals after a trend up or down. That’s no necessarily the case this time. We might get some red on Monday in order to fill the gap from Friday, but after that, the market should continue it’s bullish rise.
Last week’s rise in the stock market caused the weekly technicals to turn neutral. All 4 major indices have the exact same technical analysis. The MACD is bearish, the candles are bullish, and the RSI is neutral. There might be some concern about the fact that the candle last week was a hammer, which typically indicates a reversal. But outside of one green candle the week prior, we weren’t really in a bullish trend, so I’m not convinced the candle actually indicates a downturn in the market. Regardless, it’s really hard to say if we’re reversing to the upside again, or just pausing before a continuation to the downside, as the weekly technicals are very neutral.
Economic News
It’s all about the Federal Reserve speakers this week. We have 11 Fed members speaking this week, with a Fed member speaking every day this week. So review the Fed speech calendar below, because this week could get very volatile intra-day.
Outside of the Fed speakers, there’s very little economic news being released this week. We do have Consumer Credit on Tuesday and Consumer Sentiment on Friday that both could cause some slight intra-day movements though.
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 more major companies reporting. Monday after the close Palantir reports. Then Tuesday before the open Walt Disney reports, while Tuesday after the close Rivian reports. Then Wednesday before the open we have Uber, Shopify, and Affirm reporting. That is followed up Wednesday after the close with Arm, Robinhood, Airbnb, and AMC reporting. We continue Thursday before the open with Roblox, and Thursday after the close with Marathon Digital, SoundHound, and Cleanspark.
Crypto
Although technically still in a downtrend, crypto has been rising over the past 4 days. Bitcoin bounced right off of a strong support level at $57,500. It’s struggling to turn bullish on the technicals though, so it’s hard to say what will happen this week. I’m just in a wait and see period right now with crypto. I doubt I’ll be making any buys or sells this week.
Other Things to Know
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Wishing you the best of success trading this week,
Stock Curry