An agreement to raise the debt limit has been tentatively agreed upon by President Biden (Democrat) and Congressional Leader McCarthy (Republican). The agreement will now move to Congress for a vote, where both Republican and Democrat leaders believe they have enough votes for the deal to pass. This is good news which should cause the markets to rise, but watch out for a possible credit downgrade. Both Fitch and Moody’s have said they are considering the possibility of downgrading the US credit rating. If the US does not receive a credit downgrade (it’s only happened one time before in history; in August 2011), then the stock market will historically rise over the next 5 weeks. But if the US does receive a credit downgrade, then the stock market could fall by 15% over the next 5 weeks, before recovering over the next year. So historically, the best time to buy the dip is right now, but if the US receives a credit downgrade, then historically it’s best to sell immediately, and then buy the dip in about 5 weeks. Keep in mind the last time the US credit rating was downgraded, the downgrade occurred 2 weeks after the debt limit raise was agreed to, so at any point in the next two weeks, the US credit rating could still get downgraded despite the debt limit agreement.
Last Week Recap
The stock market sold off on Tuesday and Wednesday over fears that a debt limit agreement would not be reached in time, only to rally on Thursday and Friday over hopes that a debt limit agreement could still be reached by the June 1 deadline. Helping things was Janet Yellen delaying the so called X-date when the US would run out of money from June 1 to June 5, giving Congress and the President more time to work out a deal.
Nvidia also reported earnings last week, and while earnings were only a slight beat, after Nvidia doubled their forecast for next quarter, the stock rallied 30% in one day, reaching a new all time high, and skyrocketing the forward PE ratio to 85. Most people agree this rally is unstainable, with many NVDA bulls selling their stock on Friday as the stock approached $400. So I would warn against trying to FOMO into this stock (buying in fear of missing out on the rally continuing), as most people think the rally is near the end, and NVDA is due for a pull-back soon. Technically though, with NVDA at an all time high, there is nothing stopping the stock from running higher, although $400 appears to be a psychological resistance level for now.
The fear and greed index (https://www.cnn.com/markets/fear-and-greed) remains in the greed stage for the 6th week in a row, finishing 1 point higher than last week at 68. But the rise in the fear and greed index was mostly due to Nvidia causing the S&P to rise. The stock market breadth (how many stocks are rising vs falling) remains in the fear stage, indicating that the rally in the stock market remains limited to only a few mega cap tech stocks, and the rally is not spreading to the overall market. That means that if the mega cap tech stocks top out and start to fall, they will quickly bring down the entire stock market.
Despite a brief rise into the fear stage on Wednesday, the volatility index (VIX) remained in the greed stage by the end of the week, although it did rise quite a bit to 17.95. Keep in mind that any number below 18.50 indicated greed and bullishness. This shows that while the market is still bullish, options traders are starting to hedge against a possible downturn in the market. So in summary, the stock market is bullish, but cautious.
While the S&P and NASDAQ remain 100% bullish on the daily charts, the DOW fell into bearish territory while the Russel rose into bullish territory. The DOW fell below the 10 and 21 day EMAs while the MACD and RSI remain bearish as well. The Russell 2000 on the other hand closed slightly above the 10 and 21 day EMAs while the MACD and RSI finished slightly above neutral. So overall the S&P and NASDAQ are 100% bullish, the DOW is 100% bearish, and the Russell is essentially neutral, though slightly bullish. This is a reflection of the fact that the mega cap tech stocks (which make up 25% of the S&P and 50% of the NASDAQ) rose, while the rest of the stock market fell or traded flat. If looking at the stock market overall, it’s generally neutral or bearish, while the 5 mega cap tech stocks are extremely bullish. But with the mega cap tech stocks now approaching overbought status, many people expect a slight pull-back soon.
The weekly charts paint a similar picture with the DOW 100% bearish, and the S&P and NASDAQ 100% bullish. The difference is that the Russell is 100% bearish on the weekly charts despite the daily charts turning neutral and slightly bullish. This could be an indication of the Russell bottoming out and getting ready for a rebound. This could be helped by a pull-back in the mega-cap tech stocks should a sector rotation occur and money flow out of the mega-cap tech stocks and back into small caps. Should such a sector rotation occur, it would cause the Russell to rally while the S&P and NASDAQ fall.
While there’s no major economic news on the calendar this week, investors need to keep their eye on news of the debt limit agreement getting passed or rejected in Congress, as well as any news of a possible US credit rating downgrade. Smaller economic news that could move the markets this week include the Consumer Confidence report on Tuesday, and May jobs data on Wednesday, Thursday, and Friday. Friday is the official jobs data which will have the biggest market impact, but Wednesday’s ADP private payroll data also generally has a fairly large impact.
Some Fed members speak on Tuesday, Wednesday, and Thursday, but these speakers won’t have the impact that other Fed members could have. Keep in mind the June FOMC meeting takes place in 2 weeks on June 13 and 14, and this month’s FOMC meeting will include an updated Summary of Economic Projections.
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 is coming to an end, but there are still a few notable companies reporting earnings this week, including Crowdstrike and Salesforce on Wednesday.
Other Things to Know
I’m out storm chasing this week, so YouTube videos will be a little lacking this week. I’ll post videos where I can, but most days I will be busy chasing tornadoes. I should be back home and back to producing videos on Monday, June 5th.
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