Things are turning around in the stock market, and bears are trying to re-take control. But their success will depend upon the CPI report that comes out on Tuesday, as well as other factors such as rising volatility and a strengthening dollar. Here’s everything you need to know before the stock market opens on Monday.
Last Week Recap
The stock market fell last week with the NASDAQ being the biggest loser, finishing the week down 2.41%. The S&P had it’s worst week in nearly two months. And the stock market saw massive outflows as attractive bond rates caused investors to pull their money out of the stock market and invest in the safety of the bond market instead. Meanwhile PE ratios (also known as “multiples”, or how expensive the stock market is) are now higher than they were a year ago in the DOW. The dollar index (DXY) also rose. A strong dollar puts downward pressure on stocks. Energy prices also rose, with oil up over 8% on the week. And deteriorating relations between China and the United States over downed air balloons caused concern for Chinese stocks listed in the United States.
Market sentiment dropped due to falling stock prices and rising volatility. Market sentiment is still in the “Greed” stage though (https://www.cnn.com/markets/fear-and-greed), which indicates investors are still bullish. The overall rise in stock prices over the past few weeks, as well as the number of stocks rising has remained in the “Extreme Greed” category. Options traders also remain bullish with the put/call ratio (the number of people buying puts vs the number of people buying calls) well below 1, indicating a large number of call options being purchased compared to a relatively low number of put options being purchased. This leaves options traders with an “Extreme Greed” market sentiment as well. The most notable drop was in market volatility, which is measured by ticker VIX. The VIX rose above 20 on Thursday and Friday, indicating volatility is rising. Rising volatility pushes stock prices down. The VIX failed to rise above the 50 day moving average though, so there’s still a chance for bulls to hold on to control of the stock market. But the VIX will have to fall back below 20 to lock in a continued bull run.
The daily charts have turned bearish, with the Dow, S&P, and Russell all forming MACD death crosses this week (circled in yellow near the bottom of the below image). The S&P also fell below the uptrend channel it had been trading in for the past month (boxed in yellow in the chart below). Further, the S&P, NASDAQ, and Russel all fell below their 10 day moving averages, while the Dow fell below both the 10 day and 21 day moving averages. All of the major indices remain above their 50 day moving averages though, and the VIX is also below the 50 day moving average. So the daily charts have turned quite bearish, but with all of the major indices above their 50 day moving averages, there’s still a chance for bulls to retake control this week with a positive CPI report.
Despite the daily charts turning bearish, the weekly charts remain extremely bullish. All of the major indices remain well above their 10 week and 21 week moving averages. They also all have positive MACD indicators and RSI values above 50. The weekly candles show rejection off of major resistance levels though, so the weekly charts may be indicating a pause in the bull run before we continue higher.
The January Consumer Price Index (CPI) report will be released on Tuesday at 8:30 am (one hour before the market opens). Expectations are for CPI to have risen 0.4% month over month, with core CPI to have risen 0.3% month over month. But year over year CPI is expected to come in at 6.2% (down from 6.5% last month), and year over year core CPI is expected to come in at 5.4% (down from 5.7% last month). The market is expected to move significantly on Tuesday after the CPI report comes out. I would not be surprised to see a more than 2% move up or down in the Nasdaq on Tuesday.
On Wednesday we get January retail sales and US industrial production. The January retail sales number could be a market mover on Wednesday. Retail sales declined 1.1% in December vs the month prior. Then on Thursday, the January producer price index (PPI) will be released. The PPI can be an early indicator of CPI in future months. We also get the January figures on new residential construction and building permits, as well as the weekly job numbers on Thursday. We also have two Federal Reserve members speaking this week – one on Monday and another on Thursday.
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 season remains in full swing with the focus now shifting to the retail and services sector of the economy. Earnings so far have been dismal, with only 69% of S&P 500 companies reporting positive earnings, well below the 77% average over the past 5 years. And earnings have only exceeded estimates by 1.1%, well below the 5 year average of 8.6%. Overall earnings growth is -4.9%, which is the first quarter since 2020 that companies have reported an overall decline in earnings. Forward guidance has also been overwhelmingly negative, with 58 S&P 500 companies reporting negative guidance, and only 13 reporting positive guidance. Despite the decline in earnings and negative earnings guidance, stocks have generally risen this earnings season due to the extremely bullish market sentiment.
Other Things to Know
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Wishing you the best of success trading this week,