Moody’s downgraded the US credit watch to negative, Congress only has one week left to avoid a government shutdown, and inflation data is coming out later this week.
After the fastest rally in the stock market in over a year, can the market continue to rally, or is it due for a slight pullback. While I gave most of my analysis for this week in the video I just released (https://www.youtube.com/watch?v=zGSDB-Omkwk&list=UULFxFRGG-_23Kqxe0YexDc1eg), I do want to discuss some additional details in this week’s newsletter.
Last Week Recap
The stock market continued its rally last week with the S&P 500 wrapping up a 7% gain over the past two weeks, and the NASDAQ wrapping up a 9% gain over the past two weeks. In the NASDAQ, nearly all of the losses over the past 4 months were recovered in just 2 weeks. This has been the fastest and largest rally in years, with the market up 9 out of the past 10 trading days.
The only day the market fell was when Jerome Powell, perhaps out of some fear about how fast credit conditions were loosening, tried to come out as hawkish at his International Monetary Fund (IMF) speech. Outside of that though, the market ignored the Federal Reserve and rallied. The question now is, did the market go up too fast? Are we due for a pull-back, or is the just the beginning of a longer-term rally in stocks?
While I answered most of those questions in my latest video (https://www.youtube.com/watch?v=zGSDB-Omkwk&list=UULFxFRGG-_23Kqxe0YexDc1eg), let’s discuss some additional details here.
Despite the rally over the past two weeks, market sentiment remains bearish, with the CNN Fear and Greed index (https://www.cnn.com/markets/fear-and-greed) finishing in the Fear stage once again. While market momentum is obviously bullish after the rally over the past two weeks, the rest of the indicators are bearish.
Most notably, stock price strength and stock price breadth are bearish. This means the rally over the past two weeks has been limited to just a few stocks. Once again, the mega-cap tech stocks, the magnificent seven as they’re known, are the stocks that are rallying, while most of the stocks in the stock market remain nearly flat.
Last week, more stocks hit 52 week lows than stocks hit 52 week highs. And the Russell 2000 remains very close to the October 2022 lows, having fallen over 3% last week as the S&P and NASDAQ continued to rally.
Despite the Fear and Greed index being meh, the volatility index (VIX) continued to drop last week, falling even further into bullish territory. What’s happened in the past is that market sentiment has been slow to change. Investors often become fearful too late, after markets have already crashed, and they often become greedy too late, after markets have already rallied. So the VIX may be a better indicator of where the market will go over the next few weeks than the Fear and Greed index will be – and the VIX is ultra-bullish.
After the massive rally over the past two weeks, the daily charts on the major indices are extremely bullish – on all of the major indices except for the Russell 2000 that is. The Russell 2000 actually remains mostly bearish. This is due in large part to the fact that the rally in the stock market over the past few weeks has been mostly limited to a few mega-cap tech stocks, while the majority of the stock market has missed out on the overall rally. The last time this happened in October 2022, the mega-cap tech stocks continued to rally on their own for about 6 months until the overall market eventually caught on. So keeping in mind that 25% of the S&P 500 and 40% of the NASDAQ 100 is made up the top 7 mega-cap tech stocks, this explains the bullishness in those indexes. Whether you consider the markets bullish or bearish right now depends upon whether you’re only looking at the mega-cap 7 tech stocks which are ultra-bullish, or if you’re looking at the remaining 9,000 stocks which are still bearish.
On the DOW, S&P 500, and NASDAQ, the weekly charts are mostly bullish. On those 3 indexes, the candles are above all of the EMAs and the RSI is above 50, both of which are bullish. But the MACD remains bearish on all 3 indexes.
The Russell 2000 continues to tell a different story though. The weekly chart on the Russell 2000 remains 100% bearish, especially after the 3% drop in the index last week, which wiped out half of the prior week’s gains. The Russell 2000 remains near the October 2022 lows, which is a great reminder that the majority of the stock market remains extremely bearish, despite the mega-cap tech stocks rising.
We have big economic news this week in the form of inflation data. Keep in mind that the Federal Reserve’s dovishness, which indicated that the Federal Reserve would no longer raise interest rates, depends upon inflation continuing to come down. Should the inflation data this week show inflation rising, the Federal Reserve might be forced to raise interest rates next month, defying the stock market’s reason for rallying.
On Tuesday the Consumer Price Index (CPI) inflation data comes out for October, and on Wednesday the Producer Price Index (PPI) inflation data comes out for October. Both are expected to show a significant decline in inflation over the month prior. CPI is expected to have dropped from 0.4% month over month down to 0.1% month over month, and PPI is expected to have dropped from 0.5% month over month down to 0.1% month over month.
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 season continues this week with retail taking center stage. After economic data showed strong consumer spending, the retail stocks are widely expected to beat analyst expectations. Tuesday before the open we get Home Depot reporting, and this will have the largest effect on the DOW. Home Depot makes up nearly 6% of the DOW. Other large retailers reporting earnings this week include Target, Alibaba, Walmart, and Ross.
Other Things to Know
Crypto continues to rally, with Bitcoin now above $37,000. As expected, bitcoin mining stocks rallied last week. Alt coins rose, with some rising faster than Bitcoin and Ethereum. Some stocks you might want to consider investing in, or even buying call options on, include MARA, HUT, and RIOT.
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Wishing you the best of success trading this week,