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.
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.
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.
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:
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:
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
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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