Stock Market Prep – The Fed is Not Convinced

The Federal Reserve is not convinced inflation has fallen enough for interest rates to drop. This caused major problems last week, and could cause more problems this week, especially when the Fed’s preferred inflation gauge is released on Friday.

Just don’t forget that the market is closed on Monday for Memorial Day, so this will be a short 4 day trading week.

Last Week Recap

The stock market was mixed last week. The DOW fell 2.3% after the FOMC meeting minutes showed the Federal Reserve was still concerned about inflation and wasn’t ready to lower interest rates anytime soon. But the NASDAQ rose 1.3% after Nvidia reported better than expected earnings, and also gave a better than expected forecast. The S&P 500 was stuck in the middle, completely flat, at 0.0% on the week.

This shows that AI hype and tech stocks are continuing to perform well, especially the mega-cap stocks, while the rest of the stock market continues to struggle as the economy slows down. This split in performance is showing up in both market sentiment and technical analysis. Without a clear direction, the future of the stock market is very uncertain. Luckily we have some historical data to help us out, which I’ll discuss later.

Market Sentiment

Last week’s split in market direction showed up in the CNN Fear and Greed Index (https://www.cnn.com/markets/fear-and-greed), with the index falling back into the Neutral stage. Market momentum remains bullish, thanks in most part to the rise in mega-cap tech stocks last week. But stock price strength has fallen back down to Fear, leaving Stock Price Breadth Neutral. In short, we continue to see most of the stock market fall, while only the mega-cap tech stocks rise. This might cause the S&P 500 and NASDAQ indexes to rise, but it doesn’t mean the overall stock market is bullish.

The VIX had a volatile week last week, rising significantly on Thursday when the FOMC meeting minutes came out, and then falling drastically on Friday. The VIX hit an intra-week low of 11.52, but ultimately closed nearly flat at 11.93, and down only 0.5% on the week. The fact that the VIX closed flat on the week is another sign of the indecisiveness in the markets right now.

But you need to pay attention to historical analysis, because with market sentiment not giving a clear direction, historical direction may decide which way the market moves this week. And historically, the market starts its “Sell in May and Go Away” in the last week of May. So there’s a good chance that will start this week, and we could see a significant sell-off this week. If we do get that sell-off this week, then historically the sell-off lasts for 3 weeks, and then the market recovers in the second half of June.

Technical Analysis

The stock market is still mostly bullish, but not entirely. While the S&P 500 and NASDAQ remain 100% bullish, the DOW is struggling. In just 1 week, the DOW went from 100% bullish to 100% bearish. The Russell 2000 also became mixed, and turned neutral. All 4 major indices were 100% bullish last week, so this is a significant downturn in the markets, despite the S&P 500 and NASDAQ still remaining 100% bullish.

Unfortunately, with the markets being so mixed, this doesn’t provide a lot of insight as to where the markets will go this week. But the momentum last week is definitely in the downward direction.

The markets still haven’t turned 100% bullish on the weekly charts, even after the NASDAQ rose for a 5th week in a row. The good news is that the DOW had its much needed pull-back, and is no longer over-bought. Unfortunately the S&P 500 and NASDAQ both remain over-bought, so again, there’s just not a clear direction in the market based upon technical analysis.

One concern I do have on the S&P 500 though is the fact that last week’s candle was a doji. That is often the sign of a reversal in the market, and could indicate a drop in the market this week. That would line up with historical analysis. Once again, while nothing is certain, the neutrality last week continues to indicate a reversal in the uptrend, and a possible pull-back this coming week.

Economic News

Despite the shortened week, there’s quite a bit of economic news being released this week, some of it major.

The major economic news that will move the markets this week include Consumer Confidence on Tuesday, the Fed Beige Book on Wednesday, Q1 GDP revision on Thursday, and PCE inflation data on Friday.

Consumer Confidence will be important, because expectations are for it to continue to drop. And a decline in consumer confidence could cause the Federal Reserve to lower interest rates sooner. The Q1 GDP revision on Thursday will also be important. Last month, Q1 GDP came in much lower than expected, at only 1.6%. Now economists expect it to be revised even lower, down to 1.2%. If it does get revised lower, that could also cause the Federal Reserve to lower interest rates sooner than expected.

Both of these could be good for the stock market short term, since the market tends to rise on hopes of a Fed rate cut, despite the fact that a Fed rate cut would mean that the economy is most likely entering a recession, which is ultimately bad for stocks. Funny how that works.

Friday’s PCE inflation data will probably be the biggest market mover though, as this is the inflation data that the Federal Reserve ultimately uses to decide future interest rate decisions. The Fed already announced last week in their FOMC meeting minutes that they remain very concerned about inflation. Could Friday’s PCE inflation data cool those concerns?

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 winding down, but there are still quite a few large companies reporting. The most notable for retail investors are Futu, CAVA, and Box on Tuesday. Then Abercrombie & Fitch, Salesforce, and C3.ai on Wednesday. And finally Canopy Growth, Kohl’s, Foot Locker, Dollar General, Costco, and Dell on Thursday.

Crypto

Bitcoin rose all the way up to the top of the trading range last week before pulling back. Bitcoin continues to trade in a channel between $58,000 and $72,000. We’re still waiting for Bitcoin to break out of the channel (in either direction). Until it does, it continues to be a waiting game.

Other Things to Know

My latest video was a bit different from my normal content. I decided to help out those younger people who follow me (which aren’t many). If you have kids or grandkids who can use some advice on how to find success in this economy, make sure to share this video with them: https://www.youtube.com/watch?v=q86YjVxW6Uk&list=UULFxFRGG-_23Kqxe0YexDc1eg.