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  3. Stock Market Outlook - 2022-08-28

Stock Market Outlook
For The Week Of August 28th = Uptrend

INDICATORS

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

ANALYSIS

The stock market outlook retains the uptrend designation, but signal strength weakened after Friday's sell-off.

The S&P500 ($SPX) fell 4%, with most of that damage occurring after Fed Chair Powell's comments on Friday morning.  Earlier in the week, the index fell back into the support/resistance battleground that's been with us since late February and early March.  The SPX enters the week just above its 50-day moving average.

Technical analysis of daily SPX prices

2022-08-28-SPX Trendline Analysis - Daily

The ADX directional indicators flipped on Friday, moving this signal to a downtrend. Price & volume remains in an uptrend, thanks to the low number of distribution days.  Leading stocks (e.g. IBD Innovator 50 $FFTY) held up well all things considered.  Watch for high volume down days, especially those that cut through the 50-day.

Technical analysis of daily SPX prices

2022-08-28- SPX Elliott Wave Analysis - Daily - Primary X

Elliott Wave is still mixed.  Bearish viewpoints gained popularity last week, as did the number of possible wave counts.  In all bearish cases, the SPX is in the first wave of a new downtrend.  Some bearish counts appear to support a bullish view as they unfold, which is the reason this signal is still mixed.  A bullish view remains intact as long as the current down wave (Minor 4) doesn't drop below 3,946 (Minor 1 high).  That said, I'd expect the SPX to stay below 4367 if the bear market rally is over.

COMMENTARY

The call for choppy price action was spot on, and volatility spiked last week.  The SPX's volatility index ($VIX) gapped up last Monday and closed out the week near 26.  That's right in the middle of Hedgeye's "chop bucket" (i.e. 20-30), where the market tends to gap down sporadically.

Expanding the view to other indexes, we can see even higher levels of volatility (i.e. risk).  Both the Nasdaq and Russell 2000 have their own volatility indexes (i.e. $VXN and $RVX, respectively).

Daily Volatility Values

2022-08-28 - U.S. Market Volatility Indexes

The $VXN and $RVX ended the week above 30. A reading above 30 is affectionately referred to as the "F bucket" by Hedgeye, and means there's a high probability of sell-offs...big ones.  Keep that in mind when evaluating new trades or existing holdings.

Friday's surge in volatility was a response to Fed Chair Powell's press conference.  The size and scale of the sell-off confirms market participants expected "dovish" remarks, which were nowhere to be found.

By dovish, I mean expecting a statement like "as indicated by flattening CPI and PPI data, our aggressive rate hikes have begun to reign in inflation, and this dynamic will play an important role in upcoming rate adjustments".  A statement like this would support the "rate hikes will slow down and turn into rate cuts sometime in 2023" narrative that led markets higher in July and August.

Instead, the hawks were out:

The Fed is committed to raising and maintaining interest rates. Period. GDP slows?  Meh.  Unemployment rises?  An unfortunate, but unavoidable, side effect of getting inflation under control.

As inflation improves, expect the narrative to change.  CPI and PPI will remain important talking points, but expect to hear more about Personal Consumption Expenditures (called the "PCE").

The PCE Index dropped in July, from 6.8% to 6.3% versus a year ago. Core PCE, which excludes food and energy, came in at 4.6%.  The Fed uses Core PCE data as its primary inflation gauge.  Bullish commentators are likely to reference this number to justify their case for fewer rate hikes and end of year price targets, since it's close to the Fed's 2% goal.

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



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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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