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  3. Stock Market Outlook - 2022-05-01

Stock Market Outlook
For The Week Of May 1st = Downtrend

INDICATORS

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

ANALYSIS

The stock market outlook shows a downtrend firmly in place for the first week of May. With the Fed set to hike interest rates this week, will it be the year of "sell in May and go away"?

The S&P500 ($SPX) dropped a little more than 3% last week. The ADX shows a strengthening trend, and the directional indicators are bearish.

Technical analysis of daily SPX prices

2022-05-01-SPX Trendline Analysis - Daily

The price/volume signal remains bearish. Last week saw elevated trading volumes across the board, but the new low on Friday eliminated any possibility of a new rally.

Technical analysis of daily SPX prices

2022-05-01- SPX Elliott Wave Analysis - Daily - Primary 2

Elliott Wave shows the SPX in a corrective wave pattern. A positive divergence developed in the RSI on Friday, but there's more downside risk than upside potential at this point.

COMMENTARY

As expected, the stock markets experienced a lot of volatility. Perhaps "a lot" is an understatement, considering the Volatility Index ($VIX) spent most of the week around 30.

More than 30% of the S&P500 has reported Q1 results so far, including mega-cap names like Google (Alphabet), Amazon, Apple, Facebook (Meta) and Microsoft. Out of that group, only Facebook was able to survive their earnings release without a big sell-off. That's probably because the stock already had a massive sell-off in February.

The initial GDP estimate for Q1 didn't get as much airtime as earnings, inflation, the Fed, or "Markets in Turmoil", but it should have. The figure came in at -1.4%: yes...negative, as in a contraction! The expectation was growth of 1.1% verses last quarter. The year over year comparison looks even worse, considering Q1 2021 GDP grew more than 6%! I don't care how you slice that data, it's bad.

This week, we get another Fed meeting. A rate hike of 0.5% is the most likely scenario at the moment. We'll have to see what they say about the pace of balance sheet adjustments.

Speaking of the Fed, after seeing Q1 inflation data, we know that the "transitory" label was wrong. Now the U.S. Fed will try "catch-up" via interest rate policy and stopping bond purchases. Their plan is that higher interest rates will create financial conditions that slow down demand for goods and services, which reduces the rate of price increases, which reduces inflation readings.

Right now, the market expects that catch-up plan to include ~10 quarter-point hikes, on top of the quantitative tightening. An economy growing at ~6%, like last year (Q1 2021 GDP), could handle it. But an economy that's already contracting? Not so much. Many people think something will break long before than happens, and force the Fed to reverse course and cut rates again.

Remember, inflation and GDP are the two data points that you need to get right when looking for places to invest your hard earned capital. In Q1, we had stagflation: slowing growth with rising inflation. If inflation slows, were in for slowing growth and inflation or "disinflation". Historically, stocks get crushed when GDP growth and inflation are slowing down at the same time.

Hopefully you used the bear market bounce in late March to book profits and rearrange your portfolio. Or at least shifting some things around in early April. With the Fed on a mission to squash inflation, it will be a challenging summer for investors. One more quarter of slowing GDP and we have a recession on our hands.

Best To Your Week!


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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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