After the very hawkish pause from the Federal Reserve last week, all eyes will remain on the Federal Reserve again this week as Fed Chair Jerome Powell testifies to Congress on Wednesday and the Senate on Thursday. It could be another volatile week for the stock market.
Last Week Recap
The June FOMC meeting shocked everyone despite the Federal Reserve pausing their interest rate hikes as expected. The Federal Reserve shocked the markets in their Summary of Economic Projections (SEP) when they said they expect to raise interest rate two more times this year. Jerome Powell backed that up during the press release saying that core inflation has not made any meaningful progress in reduction and the labor market remains much stronger than expected. Most notably, the word “Soft Landing” was missing from Jerome Powell’s speech and official statement, and instead was replaced with a very hawkish stance that the Federal Reserve would do anything and everything necessary to get inflation below 2%, even if it means putting the United States into a recession.
Despite the very hawkish stance from the Federal Reserve though, the stock market rallied with both the S&P and NASDAQ hitting new 52 week highs. While the bond market sold off in anticipation of more rate hikes, the stock market rose in a belief that the Fed was lying. The NASDAQ hit a key technical resistance level on Thursday though, so we might be looking at the top of the market for now, as a small pull-back of about 5% is needed before we continue higher.
Market Sentiment
The fear and greed index (https://www.cnn.com/markets/fear-and-greed) rose again last week, finishing in Extreme Greed for the second week in a row. Because of this extreme greed, the stock market continued higher last week despite the Federal Reserve being quite hawkish at their meeting. The extreme greed might continue to push stocks up for a while, but be careful for a rug-pull. The stock market is approaching overbought territory, and a small pull-back of about 5% is needed before we continue higher.
The volatility index (VIX) rose early in the week over fears that a hawkish Fed would crash the stock market. But after the market rose despite the Fed being hawkish, the VIX dropped again, closing at 13.54… the lowest level since February 2020, and a continuation of the extreme bullishness we’ve seen over the past few months. This either marks the start of a new bull market, or is flashing a warning that the market is overbought. The VIX has strong support at 12, so if the VIX hits 12 this week, watch out for the market to top out and start going back down.
Technical Analysis
Despite a sell off on Friday, the stock market finished the week strong. All 4 major indices remain 100% bullish on the daily charts. But watch out for a possible pull-back. Both the S&P and NASDAQ finished the week in overbought territory with the RSI above 70 on both indexes. The NASDAQ also hit a strong technical resistance level at the 78.6% Fibonacci Retracement level. That means the NASDAQ has now recovered 78.6% of the losses from the 2022 October lows. Proof of this resistance level was seen Friday when the NASDAQ opened at the 78.6% Fibonacci Retracement level, but then dropped back down. The S&P 500 also got very close to the 78.6% Fibonacci Retracement level, but failed to get there by just a hair. The DOW crossed above the 78.6% Fibonacci Retracement level on Thursday, but then fell back below it on Friday. With all of the strong technical resistance in place, we could see a pull-back this week before continuing higher in July.
The weekly charts on all 4 major indices also remain 100% bullish. But like the daily charts, they are approaching overbought. The S&P 500 finished the week with a RSI of 69, just below the key 70 level that marks an overbought market. The NASDAQ on the other hand finished deep in overbought territory with a RSI of 76. While this means the stock market is extremely bullish, which will continue to put upward pressure on stocks, it also means the market is due for a pull-back, which could result in one or two down weeks before we continue the run higher.
Economic News
This week’s focus will be on the Federal Reserve speakers, although there is some important economic news to watch out for as well. Tuesday before the open, we’ll get housing starts data for May, then just before noon New York Fed President John Williams will speak. On Wednesday Federal Chair Jerome Powell will testify to Congress. Then on Thursday Powell will testify to the Senate. Existing home sales and US leading economic indicators are also being released on Thursday. The May US leading economic indicators could have a negative effect on the stock market, as the April reading was -0.6% and another negative reading for May could indicate the United States entering a recession (if we’re not in one already).
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
Although earnings season is over, we still have a few companies reporting this week that you might want to know about. The most notable of those are FedEx and Lazyboy on Tuesday, KB Home on Wednesday, and Accenture and Darden on Thursday, as well as Carmax on Friday.
Other Things to Know
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Wishing you the best of success trading this week,
Stock Curry