Last week I gave my reasons why the stock market could rally, and rally it did. The stock market just had it’s best week of the entire year. Helped significantly by a dovish Fed, which led to lower interest rates, stocks rallied on hopes that lower interest rates would help company earnings. And earnings so far this quarter have been the best in over year.
But will the rally last, or was last week just a relief rally in an overall stronger correction?
Last Week Recap
The stock market had it’s largest weekly gains of the year last week. The S&P 500 was up almost 6%, the NASDAQ was up 6.5%, the Russell 2000 was up 7.5%, and even the historically boring DOW was up over 5%. The rally was largely driven by treasury yields, including the 10 year that fell from highs of 5% down to just 4.5%. That means bond traders are now pricing in the Federal Reserve cutting rates soon, even though the Federal Reserve said the exact opposite.
During Jerome Powell’s press conference on Wednesday, the question was asked if the Federal Reserve was considering cutting rates anytime soon. Powell responded by saying that not only is the Federal Reserve not even considering the possibility of cutting rates, they’re actually trying to decide whether or not they should continue raising rates. That said, Powell did indicate that the Federal Reserve would not raise rates again this year.
Treasury yields were further helped by the US Treasury who announced a smaller than expected increase to longer-term debt auctions. With less treasuries available to purchase, the value of current treasuries rises, which in turn causes rates to drop. As interest rates go down, this lowers the borrowing costs for businesses, which in turn increase profits. As profits increase, stock prices increase. At least that’s the theory, and why stocks rallied last week.
Market Sentiment
With last week’s rally, market sentiment rose sharply, although still finished in the Fear stage on the Fear and Greed index (https://www.cnn.com/markets/fear-and-greed). While investors welcomed last week’s rally, many are concerned that the rally might not last. Was last week’s rally an over-reaction to good news in the bond market that won’t last, or was it the beginning of a longer-term sustained rally in stocks? Stock prices are still showing extreme fear, while market momentum has now risen to neutral. For bulls, this is an excellent opportunity to buy the dip and ride the momentum upward. For bears, this is a time to be cautious and wait to see if market momentum will fall back down and turn bearish again.
The volatility index (VIX) dropped sharply last week, falling nearly 30% down to 14.91. That puts the VIX deep into bullish territory. It’s great news for bulls, and terrible news for bears.
Technical Analysis
After last week’s massive rally, all 4 major indices are now bullish on the daily charts. But that doesn’t mean that the stock market is 100% bullish and guaranteed to continue to rally. Last week was so bullish, that it left multiple gaps on the daily chart. And gaps usually (but not always) get filled. I’d watch out for a reversal and decline in stocks over the next few weeks. But because any drop would most likely be technical in nature, bulls might want to use any dip in stocks this month to buy the dip and lower their average cost on their stocks.
Last week’s rally caused most of the bearishness on the weekly charts to go away, even though some bearishness still remains. I would call the weekly charts neutral at this point. While last week’s candle did close above all of the EMAs on the DOW, S&P, and NASDAQ, the MACD is still bearish, and the RSI is neutral.
The Russell 2000 stands out as more bearish than the other indices though. In fact, despite a rally of over 7.5% last week, the Russell 2000 remains 100% bearish on the weekly chart. This fact alone should give bears hope that last week’s rally might not last and that stocks might continue to fall. But once the gaps on the daily charts get filled in, bears should watch out for a possible double bottom and the start of a sustained rally in the stock market.
Economic News
There is very little economic news this week, but there are a lot of Federal Reserve members speaking. Last week’s FOMC press conference was as perfect as it gets for stock market participants, so watch out for any hawkishness that might cause a pause in the rally. Federal Reserve members are speaking every day this week.
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 so far has been the best in over a year. Overall S&P 500 earnings have resulted in a 3.7% year over year increase in earnings. This is the first increase in earnings in 4 quarters, and the largest rise in 5 quarters. With stocks ultimately priced based upon future expected earnings, this quarter’s earnings season could be the start of a much longer sustained rally in stocks.
This week earnings season continues, although most of the mega cap companies have already reported earnings. This week’s earnings to watch include Uber and Rivian on Tuesday, Roblox, AMC, and Disney on Wednesday, and Plug and theTradeDesk on Thursday.
Other Things to Know
Crypto is starting to make a comeback. Bitcoin is hovering around $35,000 right now, reaching it’s highest price in over a year. Keep in mind that bitcoin mining stocks generally act as leveraged plays on Bitcoin and Ethereum. Alt coins also typically rise faster than Bitcoin and Ethereum do. Some stocks to consider include MARA, HUT, and RIOT.
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Wishing you the best of success trading this week,
Stock Curry