2022-04-03-SPX Trendline Analysis - Daily
Two of the three indicators used for the stock market outlook (ADX & price/volume) remain bullish.
Elliott Wave shifts to mixed, with the current wave count suggesting the downtrend is back underway or will be shortly. The SPX met retracement requirements for a typical B-wave, so Tuesday’s high could mark the end of the bear-market rally.
2022-04-03- SPX Elliott Wave Analysis - Daily - Primary 2
Looking more closely, there wasn’t a divergence in the RSI or the MACD. Even though divergences aren’t a must-have, they're useful confirmations. The RSI actually made a higher high, which is usually associated with a 3rd wave. That’s shown in the chart and puts the SPX in a Minute [iv].
Based on that analysis, I’m looking for one more run at the 4650 – 4670 before the Minor C / Intermediate B-wave completes. A drop below 4300 invalidates the [iv], and means that Tuesday’s high was indeed the completion of Intermediate B and the uptrend.
Guessing you heard something about the yield curve last week? If not, the "tens and twos" inverted, meaning that the yield on the 10-year treasury note was lower than the yield on the 2-year treasury note.
Normally, financial conditions farther out into the future are more uncertain, which means more risk of loss. To compensate, investors require higher yields. When the curve (or sections of it) inverts, the bond market expects higher uncertainty in the near term.
Right now, the curve appears to be adjusting to the Fed's rate hike plans. The 3-month sits just above the rate set by the Fed (~.25%) and the 2-year yield is ~2.45%, which is basically where the Fed wants to be after all their rate hikes.
Last week's jobs report contained all kinds of "positive" information: unemployment fell to 3.6%, average hourly earnings increased by 5.6% year-over-year, and labor force participation is climbing. These figures will be used as a sign that the economy is doing well, supporting the Fed's planned rate hikes.
But you know the name of the game is really GDP. If GDP is on the rise, then tightening monetary conditions will be uncomfortable but tolerable; the so-called "soft landing" mentioned by the talking-heads. If GDP is dropping, then tightening monetary conditions will be very painful and cause a lot of asset classes to lose value. In that case, better to run through your diversification checklist and resulting asset allocations before that happens.
In terms of stocks, you may find some cover in sectors like consumer staples, health care, and utilities, but that's not a guarantee. Each cycle is different.
And diversification doesn't necessarily mean you'll make money; sometimes you'll just lose less. It's all relative. If you reference the S&P500 like most investors, then a 5% drop in the SPX is your baseline for Q1, for example. If your portfolio only lost 3%, you actually outperformed the SPX by 2%. Diversification achieved!
Finally, sometimes cash is your best/only choice. And while it's true that adjusting for inflation means cash is losing value, that same adjustment makes losses in the stock market even worse.
Best To Your Week!
Charts provided courtesy of stockcharts.com.
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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