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Stock Market Outlook
For The Week Of December 4th = Uptrend

INDICATORS

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

ANALYSIS

The stock market outlook stays in an uptrend, with the same characteristics mentioned last week; an aging, counter-trend rally with weak signal strength.

The S&P500 ($SPX) rose 1.1% last week, closing just above the 200-day moving average.  The index is now ~7% above the 50-day and starts the week at a long-term trendline dating back to mid-January.

Technical analysis of daily SPX prices

2022-12-04-SPX Trendline Analysis - Daily

The ADX and price & volume continue remain bullish but weak (ADX @ 20, trading volume below average).  The SPX registered 1 distribution day over the past 5 weeks, which would be great if trading volumes weren't so low.

Technical analysis of daily prices

2022-12-04- SPX Elliott Wave Analysis - Daily - Primary Y

Elliott Wave analysis still shows the SPX in the final stage of the Intermediate (X), counter-trend rally, but the Minute [v] wave count from last week required adjustment because of how far the market sold off Monday and Tuesday.  As of today, the Minutte waves appear to form an ending diagonal pattern (3-3-3-3-3).

It's also possible that the entire Minor C wave is an ending diagonal, which would cause a relabeling of the Minute waves. That pattern needs a few more days before it can be confirmed (i.e. a test of the 4000 price level).

COMMENTARY

Just like last year, an early December speech by the Fed chair sent investors scrambling.  Only this time around, the bears ran for cover.  There was nothing new in the speech verses Powell's prior statements.  It's investors who have lowered the bar for what passes as bullish commentary. Chairman Powell confirmed a 0.5% rate hike in December, along with the "higher for longer" narrative, while conceding that Fed policy decisions show up in data with a lag.

Thursday's PCE data showed that the Fed's favorite inflation measure remained high in the month of October, although it did retreat from September's increase.

Year over Year Change (%)
Jun Jul Aug Sept Oct
PCE 7.0 6.4 6.2 6.3 6.0
Core PCE 5.0 4.7 4.9 5.2 5.0

The personal savings rate for October also came out Thursday, showing a drop to 2.3%, which is the second lowest reading since 1959 (July 2005 was the all time low at 2.1%).

Last but not least, Friday's payroll data surprised to the upside, on both employment and wages, despite recent layoffs in the tech sector.

In summary, rate hikes decreased inflation readings since the June peak, and energy prices also retreated.  Consumers maintained spending levels using a combination of personal savings and credit card debt.  And overall unemployment remains near historical lows. So far, that sounds a lot like a soft landing for main street, which also shows up in continued top-line growth for Wall Street (i.e. corporate revenue).

That said, profit margins (earnings) shrank as companies accounted for higher costs for raw materials, debt financing, and labor.  Those costs will ultimately determine the type of earnings recession we experience in 2023.

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



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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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