The stock market declined last week as it was forecasted in my previous SP500 technical and fundamental analysis. Moreover, the index has almost reached our second target at 3770. So, is it time to buy?
Another steep rise in 10-year Treasury yields is attracting a lot of blame for recent market weakness. There’s also an awful lot of money shifting and sloshing around right now as traders try to position themselves for the “reopening” economy, and these moves may actually be causing some of the spikes in bond yields as well as swings in other markets this week.
The current worry on Wall Street is that when the economy fully fires back up and local and state governments lift restrictions consumer spending habits are going to shift and change. People will start spending more money on fuel, daycare, more flights will be booked, more money spent at restaurants, concerts, etc… This money will have to flow out of somewhere. Will it be out of things like Zoom, Peloton, and other stay-at-home stocks?
Who really knows for sure, but we are seeing some fairly heavy rotation out of stocks that saw enormous growth in the “pandemic economy,” particularly tech companies and other crowded trades pushing steep valuations. Moreover, a lot of that money appears to be shifting into slower-growing “value” stocks where investors see greater potential for growth as the economy reopens. There’s also a lot of talk amongst old traders who had to work through the dot.com bubble bursting and the associated fallout. It’s not so much the fact we are referencing similarities between the tech companies but the fact the 911 terrorist attacks and massively higher fuel cost really exasperated that fallout in the market.
In other words, at this lofty level in the tech market what happens if we catch a couple of unforeseen negative macro events? I’m not saying anything negative will happen. But the bears are worried about a new administration in Washington some countries might try to flex their muscles or see if we are going to call any bluffs. With the market, this high bears like to point out how bad it will hurt if we take a big tumble. The economy itself continues showing signs of improvement with weekly jobless claims hitting the lowest levels since November. In other words, it is indicating the labor market is recovering from the brutal winter coronavirus surge that forced many businesses and cities to shut down again.
The big test comes next Friday with the Labor Departments February Employment Report. Moreover, the next week is actually packed with economic data, with other key releases including ISM Manufacturing and Construction Spending on Monday; ADP’s February Employment Report, ISM Non-Manufacturing, and the Fed’s Beige Book on Wednesday; Factory Orders on Thursday; and Consumer Credit on Friday.
On the earnings front, investors are eager to see results from Berkshire Hathaway. Most investors are even more excited to see the company’s annual shareholder letter, which is penned every year by legendary investor and Berkshire founder Warren Buffett. The 90-year old famously shares his thoughts on the year behind and ahead and passes along his well-earned wisdom.
It’s considered required reading by many of the world’s top investors. Also, earnings next week will bring several big names, including Zoom and Nio on Monday; AutoZone, Hewlett Packard, Kohls, Nordstrom, Ross Stores, and Target on Tuesday; Dollar Tree, Snowflake, and Vroom on Wednesday; and Broadcom, Burlington Stores, Costco, Gap, and Kroger on Thursday.
SP500 Forecast and Technical Analysis
Despite the sell-off, SP500 still trades in channel up. Taking into account the new stimulus package, I will not be surprised to see a gap up or bounce up at the beginning of this week. Also, the price touched MA50 on the daily chart. In other words, it is another indication of a possible bounce. However, that rally likely will be short-lived. Cycles, Advance-Decline Line, and Intermarket Forecast still point to the downside. So, we are not looking for swing longs yet. I want to pay your attention they are timing tools and don’t give any idea about amplitude or momentum. That is to say, we can see a deeper pullback or very choppy trading till May. I think the coming few sessions will form a pattern for short-term traders. So, let’s trade following basic price action.