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Tuesday, October 4, 2022

Week Ahead: Conflicting Themes Buoy Bullish Markets But Longer Trend Remains Lower

All four major indices jumped for the week, halting a 7-week rout
Dollar slips again
Gold rises

The market narrative seems to have flipped to bullish after both the S&P 500 and Dow Jones finished their best weeks since November 2020 on Friday. The two major indices, along with the tech-heavy NASDAQ each gained at least 6% over the course of the past five trading days with the small-cap Russell 2000 ending the week in the green as well. The reasons for such optimism, however, seem unclear with analysts providing conflicting explanations for the rebound.

Good News or Bad, Equities Move Higher

Some believe there will be positive results for this coming Friday’s monthly US Nonfarm Payrolls report, despite negative consensus. These analysts predict the print will show another month of jobs growth after Personal Spending increased 0.9% in April (0.7% adjusted for inflation), beating the 0.7% consensus for the release. Increased consumer demand tends to grow the economy and boost the jobs market, all of which accelerates equity markets.

Another perspective sees the slowing economy, as illustrated by tumbling Existing and Pending Home Sales. This provides a catalyst for the Fed to not tighten policy as aggressively as anticipated—which could lure investors out of hiding. Earlier this month Existing Home Sales plunged 2.4% to a near two-year low. The data dropped for the third month in a row.

Pending Home Sales slumped 3.9% in April to a two-year low of 99.3% on the National Association of Realtors Pending Home Sales index. The read was the sixth straight monthly decline, for the slowest pace in almost ten years. Finally, according to Census Bureau data, New Home Sales plummeted 16.6% MoM from the revised March data and 26.9% YoY as published Tuesday.

In addition, rising mortgage rates made home buying less affordable. That’s also a leading indicator of a recession.

Plus, the economy contracted in the first quarter at a more accelerated pace than initially calculated. The US economy slowed to an annualized pace of -1.5%—worse than the estimated -1.3% anticipated—making it the worst quarter since COVID decimated the US economy in the second quarter of 2020.

These negative economic releases bolster the theme that bad economic news is good for markets, a concept we mention periodically.

With all that, here’s the basic conflict inherent in the current market optimism: investors appear bullish because the economy is good, but investors are also bullish because the economy is terrible. Sounds ridiculous, right? Nevertheless, stocks could extend last week’s rally on momentum alone.

However, even if stocks go up in the coming week, we don’t expect the upward momentum to last. Remember, we’re still in a bear market overall and the trends remain lower.

Don’t forget that even during bear markets stocks sometimes go up. Indeed, bear markets often provide the strongest rallies. The issue during a bear market is that investors are trading against the primary trend, increasing the chances of being whipsawed out of positions.

Meanwhile, the S&P 500 Index jumped 6.6%, with all sectors deep in positive territory. Still, Communication Services lagged with a 3.8% gain for the week, demonstrating ongoing caution among investors toward one of what used to be the stock market leaders.

Week Ahead: Conflicting Themes Buoy Bullish Markets But Longer Trend Remains LowerSPX Daily

Although the S&P 500 climbed back above the neckline of a downward-sloping H&S top, the price is still trading within a downtrend. There have been two falling peaks and troughs. Conservative investors will wait for another peak and trough round to ensure a descending series of highs and lows independent of the previous trend.

Nonetheless, the index completed a small H&S bottom that could propel the price back toward the Falling Channel top. Note that it’s risky to trade against the direction of the channel.

Treasury yields, including for the 10-year benchmark note, popped briefly on Friday after data revealed inflation tempered in April, reviving optimism the economy will be able to withstand spiking prices. However, it closed flat, perhaps due to the ongoing confusion regarding what is better for investors’ short-term goals—a stronger or weaker economy and what that means for the path to rising interest rates.

Week Ahead: Conflicting Themes Buoy Bullish Markets But Longer Trend Remains LowerUST 10Y Daily

The inability of yields to stay elevated despite the positive data confirms the H&S top, as investors hoard the safe haven asset.

Though the dollar fell for a second week, the global reserve currency remains in an uptrend.

Week Ahead: Conflicting Themes Buoy Bullish Markets But Longer Trend Remains LowerDollar Weekly

Still, there’s a lot of room for the greenback to correct. It could still head lower to its uptrend line.

In a mirror image, gold rose for a second week. Nevertheless, based on technical signals, we expect the precious metal to fall.

Week Ahead: Conflicting Themes Buoy Bullish Markets But Longer Trend Remains LowerGold Daily

Gold’s short-term move may be higher but its longer term trend is down—as indicated by the current direction of the precious metal’s channels.

Bitcoin was little changed as it continues to hover around the $30K level, trading within a range. The token’s next significant move could determine the cryptocurrency’s longer-term fate.

Week Ahead: Conflicting Themes Buoy Bullish Markets But Longer Trend Remains LowerBTC/USD Weekly 2020-2022

For a second week, Bitcoin is stuck at the level that determines the scope of a massive H&S top.

Oil climbed for the fifth straight week, to its highest level since Mar. 8. That day’s candle closed at the highest point since 2008.

Week Ahead: Conflicting Themes Buoy Bullish Markets But Longer Trend Remains LowerOil Daily

WTI’s pattern appears as a Symmetrical Triangle, but it isn’t easy to know how to draw it. If we determine that the triangle is complete with an upside breakout, the price should keep climbing, retesting the March intraday high.

The Week Ahead

All times listed are EDT

Monday

US markets closed for Memorial Day holiday

21:30: China – Manufacturing PMI: to rise to 48.0 from 47.4.

Tuesday

3:55: Germany – Unemployment Change: contraction likely deepened, to -16K from -13K.

5:00: Eurozone – CPI: expected to edge up to 7.7% from 7.4% YoY.

8:30: Canada – GDP: seen to fall to 0.5% from 1.1% MoM.

21:30: Australia – GDP: to decline to 0.7% from 3.4% QoQ.

21:45: China – Caixin Manufacturing PMI: previous reading printed at 46.0.

Wednesday

3:55: Germany – Manufacturing PMI: anticipated to remain flat at 54.7.

4:30: UK – Manufacturing PMI: expected to hold at 54.6.

7:00: Eurozone – ECB President Lagarde Speaks

8:15: US – ADP Nonfarm Employment Change: forecast to rise to 300K from 247K.

10:00: US – ISM Manufacturing PMI: foreseen to edge up to 54.5 from 54.4.

10:00: US – JOLTs Job Openings: predicted to slip lower to 11.400M from 11.549M.

10:00: Canada – BoC Interest Rate Decision: anticipated to rise to 1.50% from 1.00%.

21:30: Australia – Retail Sales: previously printed at 0.9% MoM.

Thursday

11:00: US – Crude Oil Inventories: likely to rise to -0.737M from -1.019M.

Friday

8:30: US – Nonfarm Payrolls: to drop to 320K from 428K.

8:30: US – Unemployment Rate: predicted to inch down to 3.5% from 3.6%.

10:00: US – ISM Non-Manufacturing PMI: to edge down to 56.4 from 57.1.

Source: Investing.com

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