After a massive rally over the past 3 weeks that saw the NASDAQ rise 9%, the stock market will get a break from major economic news as traders prepare for the Federal Reserve’s June FOMC meeting next week. The market will also be processing the news from last week that caused rallies on Thursday and Friday.
This week the focus will most likely be on global affairs, including rising oil prices. OPEC+ is sticking to their 2023 oil product targets, and Saudi Arabia announced further cuts to production (https://www.cnbc.com/2023/06/04/opec-sticks-to-2023-oil-production-targets-as-saudi-arabia-announces-further-voluntary-cuts.html). This sent oil price rising 2.5% back towards $80 a barrel (https://www.cnbc.com/2023/06/05/opec-oil-prices-pop-after-saudi-arabia-pledges-production-cuts.html).
Meanwhile the largest terminal at Long Beach California’s port won’t open on Monday due to a labor turmoil, causing fears of renewed supply chain disruptions (https://www.cnbc.com/2023/06/04/long-beach-calif-terminal-hit-by-labor-turmoil-and-wont-open-monday.html). Longer term, student loan payments are set to resume soon, which could cause more pressure on consumers, and in turn hurt sales of publicly traded companies (https://www.cnbc.com/2023/06/04/student-loan-payments-will-restart-soon-many-borrowers-arent-ready.html).
Last Week Recap
Two big headlines moved the markets higher last week. One was a deal between Democrats and Republicans to raise the debt limit, and the other was Friday’s nonfarm payrolls jobs report. The deal to raise the debt limit was agreed upon and passed Congress on Thursday, and the Senate on Friday. The stock market rose throughout the week as the agreement was announced.
Friday’s jobs report helped to further push the stock market up, but the data was confusing – leading some prominent investors to declare the jobs data manipulated and fake. On one hand, nonfarm payrolls in May increased by 339,000. On the other hand, the unemployment rate rose to 3.7%. All of this occurred as the number of workers stayed the same. There is no reasonable explanation for this discrepancy other than the possibility that nearly 600,000 people went out and got 2nd and 3rd jobs in May to help pay bills. If that’s the case, it spells bad news for the economy as consumers continue to struggle with high inflation – especially once student loan payments start up again.
This week the stock market will get a break from major economic news, which will give traders a chance to process the news from last week.
Market Sentiment
The fear and greed index (https://www.cnn.com/markets/fear-and-greed) remained nearly unchanged last week, continuing in the greed stage for the 6th week in a row. But while market sentiment remains bullish, stock market breadth remains bearish (in the Fear stage), indicating that the rally over the past 6 weeks remains limited to just a few stocks, while the majority of the stock market trades flat.
The volatility index (VIX) declined significantly last week, to finish at the lowest level since July 2021, and the 2nd lowest level since February 2020. This indicated extreme bullishness in the S&P 500, helped by investor sentiment rising over the debt limit agreement and the strong jobs report. But watch out, because the last time the VIX was this low (in July 2021), that marked the bottom in the VIX, which could indicate a stock market that is overbought and ready for a pull-back.
If a pull-back does occur, mega-cap tech stocks are likely to get hit the hardest as those are the stocks that have run up the most. An indication that this sector rotation out of mega-cap tech stocks has already started could be seen on Friday as the DOW rose 2.2%, the S&P rose 1.5%, and the Russell 2000 rose 3.6%, while the NASDAQ only rose 0.75%.
Technical Analysis
Friday’s massive rally caused all of the major market indices to turn 100% bullish on the daily charts. But watch out, because the NASDAQ is now overbought, with the RSI at 76. Whenever the RSI rises above 70, this indicates an overbought stock market, and can often indicate a pull-back at some point in the near future. This would be backed up by my analysis in the Market Sentiment section of this newsletter. If a pull-back does occur in the NASDAQ, it would likely bring the S&P down with it, but the DOW and Russell could continue to rise. While the NASDAQ has already recovered about 65% of the losses from 2022, the Russell has only regained 25% of the losses from 2022. A sector rotation may be on the way where the NASDAQ falls as mega-cap companies sell off, while the Russell rises and money moves out of mega-cap stocks and in to small-cap stocks.
While the daily charts are 100% bullish, the weekly charts aren’t quite there yet, but they are close. While the S&P and NASDAQ are 100% bullish, the DOW is still showing a bearish MACD, and the Russell is still not quite trading above the 100 day EMA. Although the Russell did finally get back above the 200 day MA, so there’s a very good chance the Russell 2000 will turn 100% bullish soon. The NASDAQ however is showing signs of being overbought. The weekly RSI on the NASDAQ is at 72. The RSI hasn’t been this high since the market topped out in November 2021. An overbought market (as indicated by an RSI value above 70) could indicate a top in the market, an a possible pull-back coming soon.
Economic News
There is no major economic news this week, but watch out for the FOMC meeting coming up next week. Federal Reserve members are in a black-out period, which means there will be no Fed members speaking this week. Keep your eye on the CME futures which will predict whether the Federal Reserve will pause their rate cuts next week or continue raising rates. As of the time of this writing, CME futures were predicting a 78% chance of the Fed pausing, and a 22% chance of the Fed raising rates by 0.25% again (https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html).
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
While earnings season has ended, there are still some notable companies reporting earnings this week, including GameStop on Wednesday, DocuSign and Planet on Thursday, and Nio on Friday.
Other Things to Know
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Wishing you the best of success trading this week,
Stock Curry