Weekend Stock Market Outlook

Stock Market Outlook For The Week of
April 19th = Uptrend


ADX Directional Indicators: Uptrend
Price & Volume Action: Uptrend
Objective Elliott Wave Analysis: Downtrend


The stock market outlook remains in an uptrend to start the week. The ADX and price/volume signals are bullish, while Elliott Wave still indicates a downtrend.

Technical analysis of daily SPX prices

2020-04-19-SPX Trendline Analysis - Daily

The S&P500 ($SPX) sits just above the 50-day moving average, and the current rally only has two distribution days.

Technical analysis of daily SPX prices

2020-04-19-SPX Elliott Wave Analysis - Daily

For Elliott wave, the S&P500 remains in the final leg (c-wave) of the current rally (B wave). Note the negative divergence between the relative strength (RSI) and price over the past few days. Last week's price targets for ending the c-wave are still in play: 2897, 2919, and 3175.

Technical analysis of weekly SPX prices

2020-04-19-SPX Trendline Analysis - Weekly

~22 million Americans have filed for unemployment benefits in the past 4 weeks, erasing all the new jobs gained since the bull market began in March of 2009. In my home state of Michigan, some estimates put unemployment near 25%!

There's been a lot of talk about the "shape" of the recovery; will prices trace out a V-shape, U-shape, or L-shape. Right now, it looks like a V-shape, but I don't think that will last much longer. One reason I think we'll see a U or L shape is due to corporate debt. With quarantines and lock downs in place, people aren't making or spending money. Companies are generating a lot less revenue, and if they want to see the other side of the crisis, they need to use debt to cover costs until their customers return.

The problem is that many companies have already been using debt to cover their costs, even before the pandemic. You may have heard people refer to "zombie" companies; a “zombie” company is:

  • A publicly traded firm
  • 10+ years old
  • Ratio of "earnings before interest and taxes" (EBIT) to interest expenses is less than 1

If EBIT divided by interest expense is less than 1, this means that the company doesn't make enough money to cover the interest it has to pay out. In the U.S., 16% of publicly traded companies fall into this category. Nearly a third of the companies in the Russell 2000 Index are zombie companies! (Hat tip to On My Radar by Steve Blumenthal).

One reason we have so many zombie companies in the U.S. is the fact that interest rates have remained very low for a long time. Instead of going out of business, or restructuring via bankruptcy, poor performing firms could take out more debt and kick the can down the road, so to speak. We've caught up to the can.

Best to your week!

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Charts provided courtesy of stockcharts.com.

For the detailed Elliott Wave Analysis, go to the ELLIOTT WAVE lives on by Tony Caldaro.

Once a year, I review the market outlook signals as if they were a mechanical trading system, while pointing out issues and making adjustments. The goal is to give you to give you an example of how to analyze and continuously improve your own systems.

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