S&P 500 closed a bullish week, and it formed an excellent weekly bullish divergence
As we can see on the chart, the “Mother of Stock Market” shows some signs of strengthening.
If I have to name some waves, I’d say I see good bottom signs of a C correction on the weekly chart. Yes, that’s a bold statement tho, but let’s dig in.
200 weekly moving average (4-year average) was respected, and the price has formed a signal “not to sell” called “weekly inverted hammer”. After already 3-weeks of consolidation, the price showed the expected strength, which we have already discussed in the previous analysis from the Fear & Greed index bullish expectations.
Now we have a neutral market by the F&G index. Potential wave C completion with a solid weekly bullish engulfing pattern, confirming an apparent bullish technical divergence.
If we drop down the chart to the Daily, we can see a local inverted head & shoulder pattern. The price shows signs of accumulation, and the breakout will be the confirmation.
The inflation report was hot last week; the core numbers exceeded consensus expectations.
The purchasing manager’s index continues to head south on the macro scale. Sometimes PMI heads south but then gets intercepted by fiscal, monetary, or currency intervention to re-accelerate the cycle as it happened back in 1998, 2013 and 2016. Other times it heads south into a recession. The inverted Treasury yield curve and the Fed policy now are pointing more toward the probable second scenario – recession.
You may say: “Yes, but the Atlanta Fed GDP estimator points out positive expectations like 2.9% annualized growth for Q3.”
However, the problem with this good data from the Atlanta Fed estimator is that the most significant contributor to it is a marginally improving trade deficit.
Exports and imports are not good. They fell, but imports are falling faster than exports, mainly because of US oil and gas exports. US energy sector, the US economy broadly is weaker than this number suggests. Retail sales came in soft on Friday.
Monetary policy has a long lag for its full effects to hit the economy. Interest rates are higher now, affecting only a tiny percentage of people first.
Most homeowners have locked-in mortgage rates, and corporations have debt maturity profiles that are as long as possible. As time goes on, as rates stay where they are or go higher, more people have to move or buy a home, and more corporations have bonds come due that need to be refinanced and all of this debt rollover occurs at these higher rates. This should lead to fewer consumer discretionary purchases and less corporate profitability.
Additionally, the strong dollar means that US corporations will have bad currency conversions. The 40% or so of the S&P 500 revenue from overseas will be translated into fewer dollars due to how strong the dollar is, likely resulting in lacklustre S&P 500 earnings numbers in the future.
My base case continues to be that the Treasury market or an adjacent financial plumbing issue will be the limiting factor for how tight the Fed can be regarding rates, quantitative tightening, and strong dollar policy.
Most analysts are looking at the unemployment rate and economic indicators for signals of when the Fed will pause or pivot. Still, the closer issue seems to be these deep liquidity issues due to a lack of Treasury buyers.
However, if policymakers use tactical and intermediate-term Treasury operations (e.g. this buyback twist concept), it probably would give the Fed the possible runway to really push their monetary tightness to its extreme.
This means I still don’t have a mid-term bullish view on the markets, but mostly neutral. However, I will still continue trading both directions for short-term swings.