Earnings season starts Friday, and stocks are already starting to pull-back in fear. CPI inflation data is also being released this week. Both of these are going to be major catalysts for the stock market this week, but what happens for the rest of January will ultimately depend upon whether Q4 earnings can keep stock prices elevated, or whether the market will sell-off and get back down to reality.
I apologize for not releasing a newsletter in the past two weeks. I’ve been sick with COVID. The good news is I’m feeling better, so LET’S GET INTO IT!
Last Week Recap
The pull-back I’ve been warning about for the past month finally started. After 9 straight weeks of gains, the stock market finally pulled back last week. The DOW was down 0.6%, the S&P 500 was down 1.5%, the NASDAQ was down 3.1%, and the Russell 2000 was down 3.7%. Certainly it was the DOW that kept the S&P from falling further.
What we’re seeing are the sectors that ran up massively last year falling the greatest in 2024. It appears that investors are wanting to bring stocks back down closer to fair valuation before earning season starts on Friday.
But the pull-back that started last week might not be over yet. The weekly charts are still a little over bought, and could be indicating a further decline. I had said previously that I was looking for a pull-back of around 5% – 6%, and last week’s pull-back of 3% got us about half-way there. The DOW and S&P of course still have much further to fall.
In the economic news over the past few weeks, bulls celebrated the stronger than expected labor market and lower than expected unemployment data, which further indicates a soft landing is possible, while bears celebrated the Federal Reserve’s meeting minutes, which pointed to a less certain lowering of the Federal Funds rate in 2024.
Market Sentiment
With last week’s sell-off, market sentiment has fallen. I had said previously that when market sentiment hits Extreme Greed on the CNN Fear and Greed Index (https://www.cnn.com/markets/fear-and-greed), that the market is too bullish, and due for a pull-back. That pull-back has now come. I will now be watching to see if market sentiment stops at Neutral or Greed, which would indicate a restart of the rally, or if market sentiment drops below Neutral and hits Fear, which would indicate a more significant market decline.
Based upon the VIX only rising to 13.35 however, I believe the stock market rally will most likely continue. Remember that the VIX does not indicate bearishness unless it crosses above 20, and the VIX hasn’t been above 20 since October 2023. So for now, market sentiment remains very bullish despite the pull-back we got last week.
Technical Analysis
The daily charts have turned bullish on all four major indices, but not exceedingly so. Right now they are in healthy correction territory. For now, the daily charts are indicating the market rally could continue, despite the overall bearishness. The reason for that is because despite the MACD turning bearish on all 4 major indices, the RSI remains above 50 on all of the indices except the NASDAQ.
Further, the candles on the DOW stopped falling at the 10 day EMA, and the candles on the S&P 500 stopped falling at the 21 day EMA. So long as those support levels hold, we could see the market rally re-start this week.
Despite the daily charts turning bearish, the weekly charts remain 100% bullish. Unfortunately they also remain overbought. The major gap I’ve been pointing out for the past few weeks remains, and the market will need to continue falling in order for the overbought state of the weekly charts to get fixed. So while the daily charts indicate the pull-back might be over, the weekly charts indicate the pull-back will continue.
Economic News
There is only one major economic report being released this week, and that is the inflation data for December. On Thursday the Consumer Price Index (CPI) is being released, and on Friday the Producer Price Index (PPI) is being released.
Both CPI and PPI are expected to show inflation increased vs November. Depending upon how much inflation increased, this could cause stocks to sell-off further over fears that the Federal Reserve might not lower interest rates as much as the market is currently pricing in.
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 kicks off on Friday with the banks reporting earnings. Financials are currently trading above their historical valuations, so this will be the first major test to see if stocks can maintain the high valuations they currently enjoy, or if stock prices will fall back down to reality. For a full understanding of current stock price valuations and how earnings will affect valuations, make sure to watch my latest video here: https://www.youtube.com/watch?v=FxwuFqfmg0U&list=UULFxFRGG-_23Kqxe0YexDc1eg.
Other Things to Know
The SEC rule change that would allow companies to list spot Bitcoin ETFs must be approved or rejected by January 10th. Should the SEC rule change be approved, this will pave the way for spot Bitcoin ETFs to be listed, which should be a big catalyst for the price of Bitcoin and other cryptos such as Ethereum. The only question is whether this will be a buy-the-hype, sell-the-news event, or if this will trigger a further rally in crypto. Of course should the rule change be rejected, we could see a significant decline in the price of crypto and the related crypto mining stocks.
New Book!
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Wishing you the best of success trading this week,
Stock Curry