With the stock market pricing in perfection, and after an 11% rise in the stock market in just 5 weeks, there’s more room for the stock market to fall than rise. With CPI Inflation data being released on Tuesday, and the Federal Reserve set to announce their latest interest rate decision on Wednesday, the stock market could be in a rude awakening this week. Should CPI come in higher than expected, or Jerome Powell sound more hawkish than expected, the stock market could crash (more details here).
Last Week Recap
The stock market rally fizzled last week, with the DOW up just 0.02%, the S&P up just 0.24%, and the NASDAQ up just 0.57%. A report issued on Friday showed banks and hedge funds had run out of cash. Unwilling to use margin due to high interest rates, large institutions stopped buying stocks, and the rally stalled.
The market would have finished the week in the red had it not been for Friday’s jobs report showing inflation dropping to 3.7%. That avoids a current recession under the Sahm Rule (Sahm Rule Explained), and gave investors hope for a soft landing. As a result, the stock market rose slightly on Friday, allowing the market indices to eek out small gain last week.
Market Sentiment
Despite the stock market rally stalling last week, market sentiment became slightly more bullish, with the CNN Fear and Greed index (https://www.cnn.com/markets/fear-and-greed) increasing slightly to 68, and remaining in the Greed stage. It was actually Junk Bond demand that kept the CNN Fear and Greed index from rising more. Junk Bond Demand actually fell into the Fear stage. With investors become bearish in the bond market, it’s only a matter of time until bearishness starts to enter the stock market.
And with investors expecting perfection from the CPI and FOMC this week, the VIX fell to a new 52 week low, closing at just 12.35. That once again puts the VIX at the lowest level since January 2020, right before the stock market crashed. 12 has been a strong support level ever since 2018. So there’s a good chance that the VIX may have bottomed here. If it did, that could mark the top of the bullishness among investors, and an indication that the market is about to sell off.
Technical Analysis
The daily charts started to show signs of bearishness last week as the MACD on the S&P and NASDAQ formed a death cross. Meanwhile the RSI remains overbought on the DOW and S&P, with the DOW reading an amazing 77. Any number above 70 indicates a market that is overbought and due for a pull-back.
The remaining technicals remain bullish however, with the candles on all 4 major indices above all of the EMA lines. The early indication of bearishness, combined with the remaining overbought state of the DOW and S&P, could indicate a sell-off coming soon.
The weekly charts are little changed from last week. They remain 100% bullish. But with the candles well above the 10 week EMA lines, they continue to be due for a pull-back.
Economic News
All eyes will be on the Federal Reserve this week as they announce their final interest rate decision of 2023. This month’s FOMC meeting also includes an updated Summary of Economic Projections (SEP). The SEP will give investors insight into how much the Federal Reserve plans to raise or lower interest rates over the next 3 months.
Should the SEP show anything less than the Fed cutting rates starting in March, this could cause the stock market to crash, as the stock market is currently pricing in the Federal Reserve cutting interest rates in March, as well as multiple times beyond that next year. Should the SEP show no rate cuts in 2024 (a real possibility), the stock market might sell off significantly.
On the other hand, bullish stock market sentiment might cause investors to ignore the SEP, assuming the Fed is lying, and cause the stock market to rise anyway. We’ll just have to wait to see how investors react to this week’s FOMC meeting. One thing is certain though, the market is far more likely to fall, than rally even further.
In addition, we’ll be getting the Consumer Price Index (CPI) inflation data on Tuesday. Investors are currently pricing in CPI at 3.0%. Any number less than 3.0% could cause the market to rise, while any number above 3.0% could cause the market to fall.
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 on Monday with Oracle’s earnings report. We’ll still have companies reporting every week though, and this week investors will also be interested to see earnings from Adobe on Wednesday and Costco on Thursday.
Other Things to Know
Bitcoin tanked late Sunday night as a large whale took profits and sold. While this might hurt crypto stocks temporarily, I do expect Bitcoin to recover over the next few weeks. I continue to buy crypto as well as Bitcoin mining stocks such as MARA, HUT, CLSK, and RIOT.
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Wishing you the best of success trading this week,
Stock Curry