Technically speaking, the S&P500 ($SPX) hasn’t advanced too much from July 26th or so; the index starts this week ~3% above the 50-day moving average, and >10% above the 200-day moving average.
2021-08-08-SPX Trendline Analysis - Daily
The ADX remains bullish with weak overall price movement. The S&P also picked up another distribution day. The count remains elevated (9), so the signal remains mixed.
One the plus side, the cluster of 6 from early July isn’t too concerning at this point, since recent selling has been sporadic. Another cluster now would be a bigger problem.
2021-08-08-SPX Elliott Wave Analysis - Daily - Primary 1
The uptrend signal from Elliott Wave remains in place.
Q2 earnings continue to come in on the strong side, but forward looking expectations (or lack thereof) seem to be scaring investors and causing sell-offs. Partly to blame are improving economic conditions; U.S. unemployment fell in July, and in response treasury yields fell.
Expect a lot of hyperventilating about the Fed, interest rates, inflation, and employment in the coming weeks, leading up to the Fed meeting in Jackson Hole next month. None of it will be really useful for your decision making.
Instead, take a step back and see the forest for the trees, and watch GDP and consumer spending.
We've had good economic growth, relatively low inflation, and falling unemployment with more jobs than employees some areas. The U.S. consumer continues to spend, thanks in part to government "funding".
Those conditions won't last forever. Economic growth will slow down, as we normalize pandemic-related shocks and learn to live with COVID.
We know that prices are increasing due to supply chain issues, and regardless of whether it's transitory, the Fed is going to allow inflation to increase. Plus, wages are rising (in an attempt to get people back to work), and that tends to be "sticky" (i.e. people don't like giving back raises).
Government stimulus will run out, and it's not clear if the U.S. consumer will continue to spend at the same level...especially if interest rates rise.
Put those things together and you've set the stage for stagflation: slowing economic growth (GDP) with rising inflation and high unemployment.
We don't have high unemployment, but employment is a proxy for the consumer demand (willingness to spend) and issues can occur even if it's relatively low (e.g. 1973).
During periods of stagflation, picking the right asset class/sector is critical. In terms of asset classes, commodities tend to be the biggest winners, while debt/credit based instruments struggle.
Stock and bond investors can still profit from growth strategies, but the sector becomes very important (e.g. is it rate sensitive?). For example, industrials, utilities, and big tech tend to outperform, while small caps and dividend plays tend to struggle.
For investors using an income investing strategy (specifically dividend investing), it's even more important to invest in companies that have weathered these storms before. To that end, here are to data sets for you to use:
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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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