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  5. Stock Market Outlook - 2023-05-14

Stock Market Outlook
For The Week Of May 14th = Downtrend


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


The stock market outlook remains in a downtrend, with a mixed signal set, as it has for quite some time.

After some volatile sessions, the S&P500 ($SPX) ended the week down 0.3%.  The index is above key moving averages, but remains rangebound between 4200 and 4050.  It hasn't been able to distance itself from the prior trendline of lower-highs either.

Technical analysis of daily SPX prices

2023-05-14-SPX Trendline Analysis - Daily

Price/volume remains mixed; still in search of a breakout to the upside.  Institutional selling continued during the first week of May, and then receded last week.  Since mid-March, most high volume trading days have been to the downside. So-called leading stocks, as measured by the $FFTY, haven’t made any progress since February.

Elliott Wave remains mixed and messy.  Resistance at 4196 held, but so did support at 4050.  Taking at look at the longer-term counts, another adjustment is needed and therefore a redo of the short-term counts.

The March update addressed the longer than expected corrective waves (3-wave "flat" pattern).  Now that we have more price action to work with, the extended time frame makes sense if the pattern is a "triangle", rather than a "flat".

A triangle occurs during sideways price movements, and accompanied by decreasing volume and volatility (sound familiar?). Triangles have 5 waves, with each one subdivided into 3 parts (i.e. a 3-3-3-3-3 structure).

Example Elliott Wave Pattern - Ascending Triangle

Example Elliott Wave Pattern - Ascending Triangle

In this case, an ascending triangle, based on the index meeting resistance near 4200, along with a series of higher lows (flat top, rising bottom). The key question for a bullish versus bearish count is when did the pattern begin; at the November high, or at the October low?


No post last week due to some last minute travel; life happens and sometimes there aren't enough hours in the day.  That said, not much has changed, with the market seemingly waiting for the next shoe to drop before deciding on a direction.

Lets recap some economic data with help from Hedgeye Risk Management:

  • ISM Manufacturing index increased from 46.3 to 47.1 in April
    • 6th straight month in "contraction" territory
  • ISM Services index rose from 51.2 to 51.9 in April
  • JOLTS fell to 9.59 in March; the lowest reading since April 2021
    • ~30% above long-term averages
  • April CPI decreased to 4.9% y/y ; Core CPI slowed to 5.5% y/y
  • April PPI decreased to 2.3% y/y; Core PPI slowed to 3.2% y/y
  • 90% of the SP500 has reported earnings; revenues are higher by +4.2% y/y, while earnings are lower by -3.2% y/y
  • And last but not least, the Fed raised rates another 0.25%

In summary, overall economic activity is essentially flat, and unemployment relatively low. Inflation continues to slow, but remains high versus targets. We have an earnings recession, even though companies are "beating" lowered analyst estimates. And the Fed's higher for longer policy remains in place.  So the economic situation is tenuous, at best.

Unfortunately, the U.S. now faces the debt ceiling debacle.  A couple of months back, I mentioned the topic wasn't worth discussing until we were closer to the deadline.  Well, it's closer, since the amount of money generated by our taxes wasn't as high as the U.S. Treasury expected.  Now the deadline is early June.

The recess/travel schedules of the legislative and executive branches of government leaves ~15 working days to solve the problem. And by solve the problem, I mean reach an agreement, form the necessary committees, reach consensus on specifics, submit those specifics to Congress for ratification, then get the ratified legislation to the President for approval.  Did I mention the 15 day timeframe?

You'd be forgiven for yawning after reading that paragraph.  After all, doesn't this brinksmanship always lead up to the powers that be pulling out an 11th hour solution?  While that's true, what caught my attention was the pricing of U.S. CDS; specifically the rate of change.

Credit default swaps (not to be confused with Certificates of Deposit) are used by investors to hedge or "insure" exposure to government debt, such as countries with large holdings in U.S. Treasuries like China or Japan.  PIMCO has an excellent primer on credit default swaps if you want more detailed info).

In the past, warnings were typically limited to countries that have defaulted in the past or struggled with currency issues like Brazil, Mexico, Greece, Italy, and Russia.

Last week, the spreads on 1-year U.S. CDS reached 172 basis points, which is an all-time high and up from 10 basis points 1 year ago(!).

1 year U.S. Credit Default Swap

Source: Hedgeye Risk Management

The spread on the 5-year CDS hit 73 basis points; the highest level since 2009.   Now that doesn't mean default is a given. In fact, the 173 basis points for the 1-year CDS implies that the overall probability of default is ~4% (Source: MSCI). But when rate of change data shows market participants are starting to hedge, it's time to pay attention.

The concern for most investors is their money market funds, which are largely invested in U.S. treasuries. If an agreement isn't reached, then the government will need to prioritize which bills get paid, and that includes interest on U.S. Treasuries. Seniors relying on social security payments also need to ensure they have additional funds in their checking accounts, just in case their payments are delayed/interrupted.

Happy Mother's Day!

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 Labor Statistics

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