Earnings season ends this week just as the Fed’s July meeting minutes are released. By Thursday the major news cycle will be over, and the market will ponder what’s next. Although August is historically a flat month with September being the worst month of the year for stocks, this August has started out horribly with the S&P down 2.6% and the NASDAQ down 4.5%. If this year follows the norm, we could see a rally starting this week to get the market back up to flat by the end of this month. Technical analysis shows a rebound as a possibility, but not a guarantee. With the Fitch downgrade of the US credit rating, Moody’s downgrades of multiple banks, and inflation rising, the fundamentals might outweigh the technicals and cause an even further drop in the market for the rest of this month.
Last Week Recap
Last week the markets were destroyed by Moody’s, who cut ratings on 10 banks and placed an additional 6 banks on review for possible downgrades. The 6 banks placed on review are likely to be downgraded, but because the banks are larger they require more due diligence before making a decision. Therefore most traders believe there will be more bank downgrades coming soon. And that is continuing to put downward pressure on stocks. As the commercial loan crisis worsens (it has now spread beyond office buildings, and is now affecting apartment complexes), fears of more bank failures are rising. And with business loan defaults at the highest level they’ve been since 2008, fears of another global financial crisis are putting the breaks on the stock market rally for now.
In addition, the Consumer Price Index (CPI) inflation data showed the first increase in inflation in over a year. While the increase was small (rising to 3.2% from 3.0% the month prior), just the fact that inflation rose caused fear in the market. While the market initially rose after CPI came in better than expected (it only rose to 3.2% vs a rise to 3.3% expected), by the end of the day traders had woken up to the reality that rising inflation would mean more Federal Reserve interest rate increases, and the market sold off.
Market Sentiment
The fear and greed index (https://www.cnn.com/markets/fear-and-greed) finished in the Greed stage for the 2nd week in a row, but did fall further to 66 from 69 in the prior week. This is to be expected as stocks continued to fall, but perhaps the fact that the fear and greed index didn’t fall further is a good sign for stocks. Market momentum still remains bullish, while stock price strength and stock price breadth both remain extremely greedy. But while stock traders remains bullish, options and bonds traders are showing signs of fear. The average put/call ratio as well as the VIX (both options indicators) have rapidly fallen from Extreme Greed to Neutral. And the bond market is in Fear.
But most of the fall was attributed to what happened in the first week of August. Last week the markets were mostly flat. As a result, the volatility index (VIX) fell 13% to finish at 14.84. While still higher than where it was 2 weeks ago, that level is significantly lower than the 17.10 the VIX finished at in the week prior, and the VIX still remains deep in bullish territory. It would appear that options traders are expecting a short term rebound in the markets over the next week, and that could be backed up by the technicals also.
Technical Analysis
The stock market may have finished flat last week thanks to a rebound on Friday, but it wasn’t enough to reverse the technicals. The daily charts remain mostly bearish, although the DOW is showing some signs of hope for a rebound back up. Only the MACD was bearish on the DOW. All of the other technical indicators (the candles, the EMAs, and the RSI) were all bullish. Unfortunately the only sign of bullishness shows up in the DOW, with the other 3 major indices finishing the week 100% bearish.
The S&P’s candle closed below both the 10 and 21 day EMAs, the MACD is still bearish, and the RSI remains below 50. We’re even about to get a 10/21 EMA death cross, although the S&P managed to slightly avoid it last week. The S&P also finished last week right at the 78.6% Fibonacci Retracement level, meaning the market could go either way this week.
Unfortunately the NASDAQ did form a 10/21 EMA death cross, locking in 100% bearishness. But even the NASDAQ closed right at the 50 day EMA, meaning we could see a bounce this week. The NASDAQ also formed a doji candle on Friday, which is another technical indicator of a rebound.
Finally the Russel is almost identical to the S&P with the exception that the candle is sitting at the 50 day EMA instead of a Fibonacci Retracement level. In short, while the markets are mostly bearish, they are all at technical support levels which could indicate a rebound this week.
Despite a continued bearish pattern on the daily charts, the weekly charts all remain 100% bullish. But the bullishness will be tested this week as the candles are sitting on the 10 week EMA, and the MACDs are flirting with death crosses. A rebound in the market this week could maintain the weekly bullishness, but anything less could lock in a weekly turn to the downside, and the potential for a longer trend sell-off of the markets that lasts well into September.
Economic News
There’s only one major piece of economic news this week, and that is the Federal Reserve’s July meeting minutes being released on Wednesday at 2pm (2 hours before the market closes). Sometime meeting minutes have no effect on the market, and other times they have a major effect. So we’ll just have to wait until Wednesday to see what the meeting minutes say to determine how to trade it.
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
This week officially wraps up earnings season with Cisco’s reporting on Wednesday. But Cisco isn’t the only major company reporting earnings this week. This week is a big week for major retailers. Home Depot, Target, and Walmart all report earnings this week. And with consumer spending making up 60% of the economy, this week’s earnings could have major implications for both the stock market as well as the overall economy.
Other Things to Know
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