From open to close, the S&P500 ($SPX) only fell 0.2% last week. But that number fails to capture the volatility most investors felt, as the index rose 6% from Monday's low to Wednesday's high and then dropped almost the same amount from Thursday's open to Friday's session low.
2022-05-08-SPX Trendline Analysis - Daily
The ADX remains bearish, as does price/volume.
The price/volume signal remains bearish. Last week saw elevated trading volumes across the board, but the new low on Friday eliminated any possibility of a new rally.
2022-05-08- SPX Elliott Wave Analysis - Daily - Primary 2
Elliott Wave shows the SPX in a corrective wave pattern. The RSI's positive divergence continues (good), but there isn't a confirmation from the MACD (bad). The past two weeks have a lot of volatility, so checking the counts on different time scales (e.g. weekly) is a good idea going forward.
The Fed raised rates 0.50%, as expected. At the press conference, Powell stated that 0.75% rate hikes were off the table, and stocks skyrocketed.
The question of a 0.75% rate hike seemed suspect from the beginning, since the Fed continues to provide early warnings for all moves to avoid surprises. And a 0.75% hike would have been a nasty surprise.
Then a big rally in response to squashing a rumor? Also suspect. Seems more like market makers and instantiations moving their hedges around, rather than a market bottom or economic data. Sure enough, Thursday saw a massive sell-off, as whatever trade was "on" ahead of the announcement ran its course.
Regardless, this is the first bear market for many investors; basically anyone who started investing after the "Great Recession" ended. Picking stocks is hard enough when volatility is low (i.e. VIX < 20), like it was for most of the past decade. When volatility is high (i.e. VIX > 30), forget about it. At those levels, it's best to be in cash and or on the sidelines.
I don't know when the market will turn around. One metric I'm keeping an eye on is unemployment. Since the Fed's "dual mandate" is inflation and unemployment, and inflation is really high, you could assume that the Fed will continue to raise rates until either inflation comes down or unemployment goes up.
As rates rise, stock markets correct because earnings are squeezed. When earnings are squeezed, companies cut costs (i.e. headcount).
Since there's a high probability that unemployment will go up before inflation is reigned in, I'm watching that number (among others) as a sign that the tightening cycle has ended or at least been paused.
Happy Mother's Day and Best To Your Week!
P.S. Be on the lookout for the April inflation (CPI) numbers being released on Wednesday.
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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