With the S&P and NASDAQ both in correction territory, people are starting to wonder how much further the stock market will fall. But maybe the question everyone should be asking is IF the stock market will fall. While tech earnings were somewhat disappointing, and even good earnings from Microsoft and Amazon failed to cause a rebound in the market, consumer spending remains strong and retail stocks are expected to outperform.
In fact, S&P 500 earnings on average are expected to show a 4.3% year over year increase. If true, it would be the first year over year increase in earnings in 3 quarters. And when earnings rebounded late last year, the stock market rallied. With consumer spending increasing 4% year over year, it would appear that this earnings season could be good, and could cause a rebound in the downturn, much like we saw late last year. Of course, just because a rally could happen, doesn’t mean it will.
While earnings are expected to be good this season, earnings aren’t the only thing stock market investors are looking at. Inflation remains high. And with inflation still rising at 4% per year, the 4% increase in consumer spending is getting wiped out, meaning no positive impact to company earnings. Further, with inflation not only remaining sticky, but also rising over the past 3 months, pressure is on the Federal Reserve to turn the tide and get inflation falling again. And that means more interest rate increases.
In fact, the Federal Reserve meets this week to decide whether or not to raise rates again. Based upon the Fed’s Summary of Economic Projections (SEP), the Fed is set to raise interest rates at either this week’s meeting or their last one in December. But futures are pricing in a 96% chance of the Fed NOT raising rates this time, and even a 4% chance of the Fed cutting rates by 0.25%. Once again, it’s a battle between what the Federal Reserve has said they would do, and what market investors are pricing in. Should the Fed pause and sound hawkish, and especially if the Fed should raise rates, this could cause the current market correction to intensify, and even turn into another bear market.
Last Week Recap
The stock market sold off massively last week as earnings disappointed and the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures Index (PCE), showed the rate of inflation continuing to rise. All 4 major indexes were down over 2% on the week, including the normally stable DOW. The Russell 2000 is very close to a 52 week low, and about to fall below the October 2022 lows.
Unweighted stock market indexes are near October 2022 lows, meaning if you exclude the 8 mega-cap tech stocks (AAPL, MSFT, GOOG, GOOGL, AMZN, NVDA, TSLA, and META), the stock market is still in a major bear market, and is about to fall below October 2022 lows. So while 8 stocks in the stock market may still be up multi-digit percents this year, the other 9,000 stocks in the stock market are suffering. In fact, far more stocks are at 52 week lows than 52 week highs.
When you see the technical analysis section of this newsletter, you’ll find it gets even worse. And with market sentiment still extremely bearish, it doesn’t look like the stock market wants to turn around any time soon. Ultimately though, this week’s action will come down to what the Federal Reserve does on Wednesday.
Market sentiment has fall back into Extreme Fear, with the Fear and Greed index (https://www.cnn.com/markets/fear-and-greed) finishing last week at 24. Interestingly, while stocks themselves are in extreme fear, option traders and bond traders are less fearful. In fact, junk bond demand remains in Extreme Greed, indicating bond traders aren’t worried about business loan defaults, which often occur during recessions. And options traders are only slightly bearish, with options traders buying more calls than puts last week. Could it be that options traders are expecting a rebound in the market?
The volatility index (VIX) remained above 20 last week, but it did fall 2% over the week prior. While that leaves the VIX in bearish territory, it’s interesting that the VIX fell on a week where the overall market dropped significantly. Remember that the VIX is priced based upon how bullish or bearish options traders are on the S&P 500. The fact that the VIX fell last week is a strong indicator that options traders, while remaining cautious, are starting to bet on a rebound in the market.
Even though options traders are starting to bet on a rebound in the market, the technicals are indicating a major sell-off may just be getting started. All 4 major indices remain 100% bearish. But the most notable indicator of a continuation to the selling is the fact that the S&P 500 fell below the crucial 200 day Moving Average (MA). The DOW and Russell are also both below the 200 day MA, with the NASDAQ hovering just above it. The 200 day MA is often considered a crucial level, where any close below it indicates a major sell-off starting.
That said, there is some hope for bulls. The DOW and S&P both closed right at the 50% Fibonacci Retracement level between All Time Highs and the October 2022 lows. And in fact, it was the 50% Fibonacci Retracement level between All Time Highs and the 2000 Covid Pandemic lows that triggered the bottom in the stock market in October 2022. So the 50% Fibonacci Retracement level is a crucial one. Further, the Russell 2000 closed right at the October 2022 lows last week, which it has bounced off of twice already, and might bounce off of a 3rd time this week.
So while the daily charts are extremely bearish, there is some hope for bulls in the form of some strong support levels on the Fibonacci Retracements. There is also some hope for bulls in the fact that the RSI is below 30 on the DOW, S&P, and Russell. So while there is a strong indication of a rebound this week, at least on Monday and Tuesday, we won’t know until after the Fed Meeting on Wednesday whether the stock market will ultimately rally from here, or if the correction will turn into a prolonged bear market.
The weekly charts are pretty ugly. All 4 major indices remain 100% bearish on the weekly charts. What really concerns me though, is the fact that the 200 week Moving Average (MA) is usually where the stock market bounces when in a downturn. And while the 200 week MA is at a much higher level than it was last year, the markets are still nowhere close to reaching the 200 week MA yet. The DOW would have to fall another 4.8%, the S&P would have to fall another 6.8%, and the NASDAQ would have to fall another 10.8% before the stock market reached the extremely strong support level of the 200 week MA. So while we might get a slight rebound this week, the weekly charts are still screaming that there’s a lot more pain ahead before we finally bottom out.
The biggest economic news this week by far will be the FOMC meeting. The Federal Reserve is meeting on Tuesday and Wednesday this week, with their rate decision scheduled to be released at 2pm Eastern Time on Tuesday, November 1. After the rate decision is released, Jerome Powell will hold a press conference at 2:30pm Eastern Time. On FOMC day, the market is usually extremely volatile, making day trading extremely risky.
In addition to the FOMC meeting, we have the October jobs report being released this week. On Wednesday, we’ll get the ADP private payrolls report. Then on Friday, we’ll get the official US jobs report data, including the unemployment rate, and hourly wages rate. So expect a quiet start to the week on Monday and Tuesday, followed by extreme volatility Wednesday through Friday.
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 week continues with a lot of major companies reporting. SoFi and McDonald’s report Monday before the open. AMD reports Tuesday after the close. PayPal reports Wednesday after the close, and retail investors are widely expecting a major rally in PYPL. Palantir reports Thursday before the open. We’ll have to see if PLTR can justify their forward PE ratio of 66. So far tech stocks have failed to maintain their extremely high forward PE ratios.
After the close on Thursday we have Apple reporting. Despite falling 15% from highs earlier this year, Apple still holds on to an elevated forward PE ratio of 28. While not as high as the other mega cap tech stocks, that forward PE ratio is still higher than historical averages. So Apple is a bit of a toss-up as to whether it will rise or fall after earnings, and I will not be playing it.
Other notable earnings this week include Pinterest, Pfizer, Caterpillar, Norwegian Cruise Line, CVS, Roku, Shopify, Block, DraftKings, and Fubo.
Other Things to Know
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