Earnings season starts this week and the June CPI data is being released on Wednesday. This week will be critical for the direction of the stock market for the rest of this month. While July is historically the best month of the year for stocks, that could all be upended this week if earnings miss analyst expectations.
Last Week Recap
Samsung warned of a 96% decline in earnings for Q2, as they expect to post their worst earnings since early 2009 – at the height of the financial crisis. And Nike also missed earnings, sending their stock down. With the early reporters missing expectations, it’s not looking good for the companies reporting earnings later this week.
Jerome Powell also mentioned the possibility of doing consecutive interest rate hikes and no longer pausing. This after the June jobs data came in much stronger than expected. Wednesday’s ADP private payroll’s numbers were twice as high as analysts were expecting, and the stock market sold off rapidly over fears that fighting the Fed might not actually be the best idea after all.
All 4 major indices finished the week in the red, with the DOW being the biggest loser with a 1.8% loss for the week. That’s not exactly the kind of start one would expect for the best month of the year for the stock market, and it’s leading many people to think that the stock market could pass on the typical July rally and actually fall this month instead.
Market Sentiment
Despite last week’s drop in the market, market sentiment remains strongly bullish. The fear and greed index (https://www.cnn.com/markets/fear-and-greed) finished at Extreme Greed for the 2nd week in a row, helped mainly by the stock market breadth improving. This shows that while investors may be selling the stocks that have rallied so far this year, they are still buying stocks that have not yet recovered from their 2022 lows. Investors would be wise to take note and consider selling their big winners this year while looking to buy value stocks that have not yet risen.
While the fear and greed index remained extremely bullish, the volatility index (VIX) is starting to show signs of fear coming back into the market. While the VIX closed last week well in bullish territory, it did rise to near neutral mid-week, and it still closed the week up over 9%. This means options traders are starting to buy put options in anticipation of a possible drop in the market.
Technical Analysis
The daily charts are starting to show more and more signs of bearishness. In addition to all 4 major indices having MACD death crosses, the RSI on both the DOW and S&P fell below 50 in another sign of bearishness. In addition, the candle on the DOW closed Friday below both the 10 day and 21 day EMAs. The S&P performed slightly better with the candle below the 10 day EMA, but not the 21 day EMA. The NASDAQ and Russel however are still mostly bullish, with only the MACD showing bearishness, and all other indicators still showing bullishness.
Despite the bearishness on the daily charts though, the weekly charts all remain 100% bullish. The concerns I see are that the NASDAQ remains overbought on the RSI at 71.8, and the DOW weekly candle closed right at the 10 day EMA. On the DOW, the MACD is also very close to neutral at 0.35, and the RSI is close to neutral at 53. So any drop in the DOW this week could send the DOW into 100% bearish territory on weekly charts.
Economic News
This week is full of important economic news as well as a number of Federal Reserve Presidents speaking. On Wednesday the June Consumer Price Index (CPI) is being released. Headline CPI is expected to have dropped to 3.1% year over year, even though month over month headline CPI is expected to have risen 0.3%. If headline CPI actually comes in near 3%, we could see a massive stock market rally as investors regain hope of a soft landing.
But the Federal Reserve is ultimately concerned about core CPI, and that number is expected to have barely fallen. Core CPI is expected to come in at 5% vs 5.3% last month. With the Federal Reserve focused on core CPI, and with core CPI remaining above 5%, that could cause the Federal Reserve to continue raising interest rates faster than the stock market would like, which could put downward pressure on the stock market in the future.
On Thursday the Producer Price Index (PPI) will be released, and that is expected to have shown an increase over last month. The PPI can be an indicator of how much the CPI will rise in future months.
The July Consumer Sentiment report is also being released on Friday, and that is another report the Federal Reserve looks at in determining how much inflation might be affected in the future, and as a result, how much interest rates might have to rise in the future.
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 starts this week with JP Morgan Chase officially kicking off earnings season on Friday. We also have some early reporters including Delta, Pepsico, and Progressive reporting Thursday. Once the banks report on Friday though, that will be the official start to earnings season, and the next 5 weeks will be jam packed with the biggest companies reporting earnings.
Early earnings have been dismal though. Normally the stock market rallies during the July earnings season, but if earnings disappoint, the rally might not happen. I detailed what’s happened so far with earnings and what to expect for this earnings season in Sunday night’s video which you can watch here: https://www.youtube.com/watch?v=579tFJ6P6oI&list=UULFxFRGG-_23Kqxe0YexDc1eg.
Other Things to Know
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Wishing you the best of success trading this week,
Stock Curry