Tom Lee (a long term bull) gave a warning for the next 7 weeks, and so far his prediction has been accurate. But don’t worry, because this could be one of the greatest dip buying opportunities in years. I can’t go through all of the economic data and history pointing to a correction over the next 7 weeks in this short newsletter, so make sure to watch the video I posted about it here: https://www.youtube.com/watch?v=H129MV2TiIA&list=UULFxFRGG-_23Kqxe0YexDc1eg.
Last Week Recap
The stock market absolutely crashed last week, with the NASDAQ finishing the week down nearly 6%, the Russell 2000 falling 5.5%, the S&P 500 falling over 4%, and the DOW falling nearly 3%. So what the heck happened!?
It wasn’t the September Effect; it was an onslaught of bad economic news. Tuesday started off with a 3% drop in the NASDAQ and a 2% drop in the S&P 500 after the PMI Manufacturing Data showed the economy slowing down faster than expected. To make matters worse, the forecast showed the slowdown speeding up and leading to a recession.
The bad news continued on Thursday with the ADP private payrolls reporting coming in with the lowest reading in years. Two sectors actually saw the largest job decline since the 2008 Great Financial Crisis. But the drop in the markets was minimal, as most people waited for the official jobs data on Friday.
Friday’s jobs data would turn out to be worse than expected, but showing a little relief as well. The jobs numbers themselves showed the 2nd month in a row of a significant slowdown in hiring. But that was offset slightly by the unemployment number which ticked down slightly from 4.3% to 4.2%. Still, with this now being the 2nd bad jobs report in a row, the market sold off significantly, triggering another 1.7% decline in the S&P 500, and a 2.7% decline in the NASDAQ.
The market is now deeply worried that the Federal Reserve waited too long to cut rates, and that a major recession might be starting, if it hasn’t started already. Most telling was the IT unemployment numbers, which came in at a massive 6% – the highest since the dot com bubble nearly 25 years ago that ultimately led to a 50% drop in the S&P 500 and an 80% drop in the NASDAQ. Investors had long worried that the mega-cap tech stocks were over-valued, and now those fears are causing massive sell-offs.
Market Sentiment
With last week’s market crash, it should come as no surprise that the CNN Fear and Greed Index (https://www.cnn.com/markets/fear-and-greed) fell back into the Fear category last week. Considering we were in Greed the week before, it is telling just how fast the Fear and Greed index fell. But you might be surprised to learn that most of the drop last week was in mega-cap tech stocks. This caused market momentum to drop down to Fear, but Stock Price Strength and Stock Price Breadth are both still bullish, with Breadth actually still in Extreme Greed. This means that only the mega-cap tech stocks are falling drastically, while most stocks are actually still rising. This is more indicative of a risk-off sector rotation than an overall market crash. Investors appear to be selling high-risk stocks such as tech, and moving that money into lower-risk stocks such as consumer durables and healthcare.
Of course the VIX spiked last week, as it’s mainly driven by S&P 500 options 30 days out. When the mega-cap tech stocks sell-off, that drives the S&P 500 index down, which in turn causes options traders to load up on put options, thus causing a spike in the VIX. Still, if most of your money is in the S&P 500 index (such as an ETF like SPY or VOO), you’d better pay attention. The VIX closed last week at 22.38 – which is bearish. Options traders are expecting the market to continue to fall over the next 30 days, and this lines up with what I talked about in my video Sunday night.
Technical Analysis
Without surprise, the daily technicals are 100% bearish on all 4 major indexes. The good news, if there is any, is that some of those indexes are at support.
The DOW is very close to the 50 day EMA, but that doesn’t mean much. The DOW usually falls down to the 100 day EMA before finding support. So I would not be surprised to see the DOW fall another 2% before bottoming out and rebounding with a dead-cat bounce.
The S&P 500 is at stronger support at the 161.8% Fibonacci Retracement level, but might fall another 1% down to the 100 day EMA before finding a temporary bottom.
The NASDAQ, unfortunately, is still about 2% – 4% away from support. I’m eyeing support around the 200 day EMA on the NASDAQ. But investors should take note of the 10 day EMA falling below the 21 day EMA as a signal that the NASDAQ could fall much further. There just isn’t anything real bullish about the NASDAQ right now, outside of some hope for a dead-cat bounce after another 2% to 4% decline.
The Russell 2000 is the only index actually at support. The Russell 2000 has the strongest chance of bottoming out here temporarily and rising this week. If I were to bet on an index to rise this week, it would be the Russell 2000.
The weekly charts are a mixed bag. The DOW is 100% bullish, but trending downward. The S&P 500 is 60% bullish, with the MACD being the biggest concern. The NASDAQ is 80% bearish, with only the 10/21 EMA crossover holding on to bullishness. And the Russell 2000 is 80% bullish, but right on the edge of turning bearish.
All together, while stocks appear to be trending downward, the market hasn’t turned completely bearish yet, and we may still see a few relief rallies over the next few weeks before falling further.
Economic News
We have major economic news this week that could have a significant impact on the markets. On Wednesday, the CPI inflation data for August will be released. Investors are closely watching this report, as it could give a clearer picture as to whether the Federal Reserve will do 1 or 2 rate cuts at their meeting next week.
Unfortunately FOMC members on a blackout period this week, so we won’t hear from them. The September FOMC meeting next week is one of the most uncertain meetings we’ve had in a while. We know the Fed is going to cut rates. What we don’t know is whether they’ll do 1 rate cut or 2. So expect volatility this week with the CPI data, and again next week with the FOMC meeting.
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 officially ends this week with Oracle reporting Monday after the close. But retail investors will still want to keep their eye on other popular companies reporting this week, most notably Gamestop Tuesday after the close.
Crypto
This week looks the same as last week. Crypto continues to struggle with Bitcoin now trading around $55,000. Bitcoin is at support right now at the 50 day EMA at $54,000, but the longer standing $48,500 level still seems to be the most likely bottom. If Bitcoin does fall down to $48,500, I would be looking to slowly buy in, and then loading up at $42,250. In theory, Bitcoin could fall down to the very strong support level of $25,000 if there is a major market crash, so I would set my stop loss at $38,500.
Other Things to Know
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Wishing you the best of success trading this week,
Stock Curry