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Stock Market Outlook
For The Week Of May 31st = Uptrend

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INDICATORS

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

ANALYSIS

The stock market outlook remains in an uptrend to start off June.  The ADX and price/volume are both in an uptrend, and Elliott Wave showing a "downtrend".

Technical analysis of daily SPX prices

2020-05-31-SPX Trendline Analysis - Daily

The S&P500 ($SPX) sits just about 10% above the 50-day moving average, and just abaove the 200 day moving average. The ADX is still showing a weak trend, but we have seen several days of accumulation recently.

Technical analysis of daily SPX prices

2020-05-31-SPX Elliott Wave Analysis - Daily

Elliott Wave shows the S&P500 remains in a corrective pattern (an expanded flat), with the May low as Minor A. Targets for completing Minor B were between 2999 and 3017, and the S&P hit 3068 on Thursday (shown below). If this is the case, targets for Minor C would be between 1.618 of Minor A and 1.618 of Minor B...both of which happen to be 2580.

Technical analysis of daily SPX prices

2020-05-31-SPX Elliott Wave Analysis - Daily - Minor B

Of course, we can't predict what the stock market will do; a price above 3071 this week and we'll need to adjust the pattern and targets. It's also possible for a double of triple three pattern to emerge, which would stretch out the Intermediate B wave over the summer.

COMMENTARY

Stocks performed well last week. The European Commission proposed a €750 billion recovery fund..it still needs to be approved by all EU members, which is no small task. Closer to home, U.S. GDP is forecast to decline ~40% in the second quarter (on an annual basis). That's the largest quarterly decline since the Great Depression!

In Steve Blumenthal's "Trade Signals / On My Radar" post this week, he summarized Lacy Hunt's presentation from the Strategic Investment Conference. I found the insights on stimulus spending interesting.

Basically, all the stimulus (aka debt) that we’ve taken on is merely for survival, not for productive uses. It's an attempt to fill the gap in production while the economy was shut down. As our economies reopen, we'll have to see how much of that gap we can fill without help from the Fed.

And filling that gap is not guaranteed. Consumer spending accounts for almost 66% of economic growth in the U.S. So any recovery will be linked to "healthy" consumers (financially, physically, and behaviorally).

  • Will you feel financially secure enough to take out a loan for a car or a house?
  • Will banks feel comfortable enough to lend to you? And at what interest rate?
  • Will you feel financially and physically safe enough to go to restaurants, take the subway, grab an Uber/Lyft, or go to a football game? As often as you did last year?
  • Will businesses feel secure enough to take out new loans to expand? Or will they focus on paying off debt?

All these questions must be answered for Wall Street and Main Street to discover the new "normal". This week's step in that journey is the May jobs report, which comes out Friday!

Steve followed that up with some truly amazing stats on S&P500 performance. Since 12-31-2014, the market capitalized performance of S&P stocks is as follows:

  • S&P 500 is up ~45%
  • FANG stocks are up ~400% (Facebook, Amazon, Netflix, and Google/Alphabet)
  • S&P 500 Index w/o FANG stocks is up ~35%

Based on those percentages, if you invested $10,000 in at that time, today you'd have:

  • $13,512 (S&P w/o FANG)
  • $14,531 (S&P 500)
  • $40,390 (just FANG)

Steve goes on to say:

    The point here is that just four stocks are driving returns of the major indices – especially the cap weighted indices. At the end of April 2020, FANG stocks represented 16.38% of the S&P 500 Index (cap weighted index). Add in Microsoft and Apple and together the FANMAG stocks represent 21.38% of the index. It is the large over-concentration in just a few names that is cause for concern.

This is another reason that the "stock market" seems disconnected from all the chaos that we read in the news. As long as FANMAG stocks perform well, under performance in other areas is muted. On the flip side, selling in these names will also have a disproportionate effect on S&P500 performance. Something to keep in mind as you evaluate your holdings.

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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