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  3. Stock Market Outlook - 2022-10-23

Stock Market Outlook
For The Week Of October 30th = Uptrend

INDICATORS

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

ANALYSIS

The stock market outlook flipped to an uptrend early last week.  Will response to U.S. Fed minutes throw cold water on the rally?

The S&P500 ($SPX) rose 4% last week.  Friday was year-end jockeying for a lot of mutual funds, when they attempt to meet targets, secure performance bonuses, etc.  Those flows helped move the index past the 50-day on above-average trading volume. Friday trading is harder to read, with short-date index options trading more than monthly these days.

Technical analysis of daily SPX prices

2022-10-30-SPX Trendline Analysis - Daily

The ADX signal flipped on Tuesday, joining price and volume on the bullish side and shifting the overall outlook to an uptrend. With 2 of 3 signals showing bullish price action, the market outlook shifts to an uptrend. The fledgling rally already has 3 distribution days though, so keep a close eye on your individual holdings and cut losses quickly.

Technical analysis of daily prices

2022-10-30- SPX Elliott Wave Analysis - Daily - Primary Y

Elliott Wave analysis shows the counter-trend rally hitting 3900, which was the 50% retracement target.  There's a small negative divergence in the RSI, so the wave count shown has the SPX completing an extended 3rd wave (vs. completing 5th).

COMMENTARY

The market absorbed some gut punches this week, with disappointing earnings reports sending stock prices down sharply for Amazon, Google, Meta and Microsoft.  Apple's report was less bad, so the stock rallied. If earnings reports are on deck for your holdings, hedging your positions with short-dated options is a good strategy to mitigate risk.

Over the past two weeks, pundits and contrarian investors are citing historically high levels of bearish sentiment as a reason for stocks to rally.  Many recall Warren Buffett's famous saying to be "fearful when others are greedy, and greedy when others are fearful".

The problem right now is that sentiment (feelings) doesn't reflect positioning (actions).  I mentioned the high level of bullish bets placed via call options, but it's not just derivative bets; US Equity funds saw their biggest inflows in 18 weeks according to Lipper. To me, that seems like a lot of people being greedy because they think everyone "should" be fearful.

Given the sour mood and slowing economic data, U.S. senators tried to pressure the Fed into pausing interest rate hikes.  Ironically, those same senators were worried about maintaining Fed "independence" from interference from legislative and executive branches of government a few years ago.  Go figure.

Q3 GDP and PCE figures were released. Regardless of the narratives, neither dataset slowed enough for the Fed to change course on rate hikes this year.  They're both backward looking and may not reflect current conditions, but that's what a "data dependent" Fed uses right now.

Big event risk this week heading into the Fed meetings on November 1st and 2nd. I expect a binary outcome: a hawkish interpretation sends stocks down and a dovish interpretation sends stocks up.

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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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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