The S&P500 ($SPX) rose 3.3% for the week, and sits just below the 200-day moving average, a key psychological indicator for technical analysts. As of Friday's close, the index has rallied ~18% from the June low, which is average for a bear market rally over the past 20 years (I saw that stat last week, but can't find the source).
2022-08-14-SPX Trendline Analysis - Daily
All three signals remain unchanged. The ADX and price/volume show bullish price action. The biggest caveat is the lack of trading volume, but that's not uncommon during the summer months.
Elliott Wave is still mixed, while we await to completion of the current wave, which appears to have extended. So far, it retraced a little more than 50% of the entire bear market.
2022-08-14- SPX Elliott Wave Analysis - Daily - Primary Y
A lot of U.S. inflation data to sift through last week, but overall the numbers show movement in the right direction. Both consumer and producer prices retreated during July, thanks to a drop in energy prices (mainly oil and gas), confirming inflation reached a peak in June. I say "a" peak, rather than "the" peak, because a spike in oil price likely sends inflation back up.
CPI was +8.5% year over year, versus expectations of 8.7% and a bit lower the last month's 9.1% increase. The month over month reading was unchanged from June, leading some to say the U.S. experienced zero inflation in July. A classic half truth, but I digress.
Core inflation was 5.9% year-over-year, which was a welcome surprise to the downside (6.1% was the expectation). Bottom line, CPI didn't get worse last month, mainly because gasoline prices declined 7%.
PPI data showed a +9.8% increase year-over-year, versus an expectation of 10.4%. Like CPI, the reading was below the June number of 11.3% and benefiting from the lower energy prices. Core PPI was 7.6%, below the expectation of 7.8%.
Along with the lower inflation readings came new expectations of smaller rate hikes for the rest of the year. Before everyone gets carried away, year-over-year inflation is still rising. Even if August, September, October, and November M-o-M readings showed no change, the Y-o-Y CPI in December would STILL be show a 6.5% increase (3x the long term target of 2%).
Even if we had zero additional inflation for the rest of the year, CPI would not reach Fed’s 2% target (applying pre- or post-COVID averages brings it down much less) @biancoresearch @BLS_gov @ClevelandFed— Liz Ann Sonders (@LizAnnSonders) August 11, 2022
The Inflation Reduction Act was passed, but it's light on inflation reduction and heavy on stimulus. There's a lot of investment and subsidies in the bill, which is inflationary, even if it's also good strategically/geopolitically. The higher corporate taxes and buyback fees will increase corporate expenses and lower profits, and that should lower job and wage growth, which should eventually lower inflation. The bill IS projected to reduce the federal deficit, so calling it the Deficit Reduction Act is more accurate, but I digress...again.
Q2 earnings season is winding down, and for the most part, earnings beat expectations. Those expectations were double-digit percentages lower verses a year ago, but that didn't matter much to investors as they piled back into the market. I even heard a narrative that a recession won't be as bad as feared, because earnings season was so strong! Of course, the same people were adjusting the rule-of-thumb definition of a recession two weeks ago, in order to say the U.S. wasn't in a recession...
Bull or bear, let price be your guide. The signals tracked here have been bullish for a few weeks, and long-only investors probably have a nice recovery in their stock holdings. It's a great time to review your holdings and take profits if you have them. Or reduce your level of risk if the March and/or May drawdowns kept you up at night!
Best To Your Week!
P.S. If you find this research helpful, please tell a friend. If you don't, tell an enemy.
Sources: Bloomberg, CNBC, Hedgeye, U.S. Bureau of Labor Statistics
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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