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Stock Market Outlook
For The Week Of August 30th = Uptrend

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INDICATORS

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

ANALYSIS

The stock market outlook remains in an uptrend heading into the week, with bullish trends in place for the ADX, price/volume, and Elliott Wave.

Technical analysis of daily SPX prices

2020-08-30-SPX Trendline Analysis - Daily

The S&P500 ($SPX) now sits ~12% above the 200-day; odds still favor sideways or downward price action near-term. But the first technical support level would be the May to June trendline.

The ADX shows a strong bullish trend in place, and price/volume action has also been bullish. The "correct" Elliott Wave count isn't clear (to me at least). I adjusted the wave labeling, but all I really know is that it hasn't turned bearish yet, so it's still risk on.

Technical analysis of daily SPX prices

2020-08-30-SPX Elliott Wave Analysis - Daily - Intermediate C

Considering the current rally has retraced the entire downtrend and price is sitting at all time highs, it's possible the S&P will reach a Fibonacci extension target before another correction. For example:

  • 114.6% of the prior downtrend = 1377 points = 3,568 (~2% from Friday's close)
  • 123.6% of the prior downtrend = 1485 points = 3,676 (~5% from Friday's close)
  • 132.8% of the prior downtrend = 1596 points = 3,787 (~8% from Friday's close)
  • 161.8% of the prior downtrend = 1944 points = 4,135 (~18% from Friday's close)

The RSI may not be showing a divergence anymore, but now it's extremely overbought; pick your poison.

COMMENTARY

Earnings season is wrapping up, with most companies reported better than expected earnings in Q2. Definitely the right direction, but definitely not an all clear. You may have also heard that some heavyweights of the Dow Jones index (Exxon Mobil, Pfizer, and Raytheon) will be replaced September 1st by Amgen, Honeywell, and Salesforce.

More importantly, the Fed held their annual meeting in Jackson Hole, Wyoming, which included a major change in the way inflation will be viewed in the years ahead.

Basically, the Fed doesn't want deflation. They're so scared of it that they're willing to let inflation run higher than their 2% target if inflation is below that target for too long...like it has been...for the past 10 years...despite the Fed's use of record low interest rates and massive lending programs (the Fed can lend, but not spend...at least right now).

Near term, that probably won't change much...interest rates and inflation have both been low for a while now. And now we know rates won't change even when we do finally see inflation.

This creates issues for investors and their asset allocation strategies. Stocks will outperform with rates near zero, because they're basically the only game in town if you want a return. Investors have also piled into bonds, because any return is better than no return or a loss. But when we eventually do see sustained inflation over and above the target, one or two quarter point rate hikes aren't going to cut it. And that's going to shock the system.

Bonds lose value when rates rise...great for investors looking to buy, but not so good for those who need to sell. Rising rates aren't usually good for stocks because the cost of doing business (raw materials, corporate debt, wages, etc.) are higher.

From a personal finance perspective, this is a troubling development too.

Think back to a time when you got a "cost of living" raise at work; this was meant to compensate for increased expenses due to inflation. Rudy Havenstein tweeted “When you see the word ‘inflation,’ replace it with the phrase ‘the cost of living' and see if you like what you hear". When we do finally see inflation, expect you're expenses to increase more for a longer period time.

And +2% inflation is already here...it's just not evenly distributed. How you personally experience it is totally dependent on your expenses. Have a lot of housing, health care, education, or energy expenses? Then you know what I'm talking about. Letting average inflation run higher than 2% will likely mean those expenses increase even more in the coming years!

And since the Fed calculates inflation based on a bunch of different expenses, that distribution is even more lumpy. Let's say the your meal/pet toy/clothes subscription box goes from 25 to 30 bucks a month (for example). $5 may not seem like a big deal, but that's 20% inflation! At the same time, your new OLED TV probably goes from $799 to $749. Average those two expenses together, and the net inflation is actually <1%; if those two expenses were the "basket of expenses" the Fed uses to calculate inflation, they would say that we need to continue with lower interest rates because we're below target.

It's not all bad though. We all still have time to prepare, do research, make a plan. Some jobs will command much higher salaries. You'll actually be able to get a decent return from a savings account! And all the money that central banks have and will unleash has to go somewhere. Where will that money flow? Bonds? Gold? Crypto? TIPS?

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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