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Stock Market Outlook
For The Week Of October 16th = Downtrend


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


The stock market outlook remains in a downtrend after another volatile week of trading.

The S&P500 ($SPX) rose 1.5% last week, but that seems pretty tame considering its ~6% gain mid-week.  The index closed ~10% below the 50-day and ~15% below the 200-day moving average.

Technical analysis of daily SPX prices

2022-10-16-SPX Trendline Analysis - Daily

The ADX? Still bearish.  Price/volume remains in a downtrend for now.  Thursday’s reversal counts as “Day 1” of a potential rally. The most robust rally confirmations (>1.5% increase on higher than average trading volume) typically occur between Day 4 and Day 10, so be on the lookout next week.

Technical analysis of daily prices

2022-10-16- SPX Elliott Wave Analysis - Daily - Primary Y

After diving below the September low, Elliott Wave appears to show a completed 5-waves pattern.  That view is supported by positive divergences in both the RSI and MACD technical indicators.  The 5th wave looks compressed, time-wise, but that's to be expected during highly volatility trading periods (VIX > 30).

If the count holds, a 3-wave, counter-trend rally is in play.  It’s possible to have a full retracement, back to 4325, but that seems unlikely given current economic conditions.  3900 is a 50% retracement of the August high and represents a ~9% rally from Friday's close.  It's also back in that middle of the May-June, July resistance “band”.  That's just enough of a countertrend rally get bullish investors back into stocks before the next rug pull.


Another U.S. CPI report, another higher than expected reading.

  • CPI
    • +0.4% MoM; +0.2% expected
    • +8.2% YoY; +8.1% expected
  • Core CPI
    • +0.6% MoM; +0.4% expected
    • +6.6% YoY; +6.5% expected

Even though the Fed really cares about PCE, elevated CPI readings provide more cover for interest rate hikes at the next Federal Reserve meeting.  It also destroys the "peak inflation" rationale for any market bounces.

Peak inflation or not, the debt market is signaling more pain ahead for the economy and investors.  The yield curve inverted even further to -52 basis points or -0.52% (2 year vs. 10 year treasuries).  That's the biggest inversion since the early 80's!  How many of today's advisors were managing money back then?  How many were even born back then?

It's not just a U.S. phenomenon either; per the World Government Bonds website, 18 countries have an inverted yield curve, including:

  • Chile
  • Canada
  • Czech Republic
  • Hong Kong
  • United States
  • Poland
  • Iceland
  • Sweden
  • South Korea
  • Hungary
  • Turkey
  • Pakistan
  • Kazakhstan
  • Brazil
  • Mexico
  • Nigeria
  • Ukraine
  • Russia

Global recession risk indeed!  And that doesn't count several countries with partially inverted yield curves.

Personally, I think the U.S. market is due for a tradable rally.  It won't be the time to go all-in from an investing standpoint.  And before you regurgitate those stats about missing the 10 best days in the market, I have two things for you to consider:

  1. The biggest one-day gains in stock market history have come in bear markets, not bull markets
  2. Being OUT of the market for the 10 worst days has a bigger impact on your portfolio than being IN the market for the 10 best days (chart is old, but supports the point)

Source: LPL Research

Earnings season began last week with big banks reporting Q3 results; looks like they're beating estimates, but down versus last year.  Pay attention to the rate of change in earnings; it will tell you much more about the company's future prospects than whether or not they beat soft estimates.

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, Federal Reserve Bank of St. Louis, Hedgeye, U.S. Bureau of Economic Analysis, U.S. Bureau of Economic Analysis, WorldGovernmentBonds.com

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