Keith Schneider | May 30, 2022 01:31AM ET
After 7 consecutive negative weeks for the S&P 500 (8 for the Dow), we witnessed a healthy reprieve this past week.
The stage for the past week’s rally was set by the prior week’s wild Friday (May 20th), during which the S&P 500 was down over 2% intraday and within a whisker of hitting the commonly accepted bear market designation of a 20% correction from all-time highs. However, as the media highlighted the bear market level, the market reversed and rallied to end the day in the green.
Monday’s follow-up rally created a 2-day pattern that market technicians (chart readers) could label as a reversal. Tuesday’s negative price action tested this idea, and then the healthy rallies that followed on Wednesday, Thursday, and Friday proved the pattern correct. The S&P 500 closed the week up 6.5% and over 9% higher than the prior week’s “bear market” low. It was the biggest weekly gain since Nov. 6, 2020 (+7.3%) and two other weeks that market the 2020 pandemic low.
More importantly, we finally had a positive week and broke the longest losing streaks since 2001 and 1932 in the S&P 500 and the Dow respectively.
While consecutive 7-week losing streaks are rare in the S&P 500, they are not without precedent. They often are indicative of weakening economic indicators. Many times, they precede downward earnings revisions. However, while rare, they are often followed by a future winning track record. See below:
Many talking heads believe this past week’s positive rally was due to the reporting of slightly lower indications of inflation. The April PCE (Personal Consumption Expenditure), a Fed favored stat, came in at 0.2% providing evidence that inflation may be peaking. Inflation may be slowing directly as a result of too high commodity prices, mortgage rates spiking, and general demand destruction.
This past week too, the beaten-up sectors experienced huge rebounds. Specifically, consumer discretionary, technology, and real estate were the leaders. As we noted in last week’s Market Outlook, this market moves fast and furious. More on that in the Big View section below.
That will remain the big question. However, if you manage your investments tactically and actively rather than strictly buying and holding, there are opportunities in either outcome.
From a technical standpoint (more in Big View below), the S&P 500 (via SPY) is well below both the critical 100-day (blue line) and 200-day (red line) moving averages. And both of those averages remain in a downward sloping line indicating that we are still in an intermediate negative market.
A bottom? Not. The economic indicators remain negative and quite dour on the economy. Let’s pick up from a few weeks ago with a summarized version of our Macro View:
Remains negative. Still very high. Crude prices rose this week and gasoline at the pump is up 50 cents per gallon for the past 30 days and up on average $1.61 a gallon since lasts Memorial Day 2021.
We take this from positive to neutral. Many companies are talking about freezing hiring, especially in the Technology sector.
Remains negative. Russia is still attacking Ukraine, and there are problems in the Asian sector, including Taiwan and North Korea saber rattling.
Remains very negative. The baby formula problem is just the tip of the iceberg.
While PCE came in a bit lower providing some relief to the credit markets, don’t kid yourself. The Fed has plenty of hiking to do. Rates should back up again.
Remains neutral. It has improved, but not enough to turn this negative yet.
Remains Negative. See Big View below.
Negative. Nothing has changed. Fed tightening.
Neutral. This may improve with the market’s rally. However, past relief rallies did not attract material money flows. People move slowly once fear kicks in
Neutral. This is one area that has improved. Watch High Yield bonds (JNK or HYG) for any indication that this turns negative again.
With 4 neutral and 6 negatives, we remain cautious and negative on the economic backdrop. We remain steadfast that we are range-bound and are experiencing stagflation.
A bounce? Absolutely. Buying the market towards the end of a month, right before a holiday, has tended to have an upward bias. However, right after these periods, the market also has a tendency to settle in and has not done as well. See below:
We remain steadfast in our vigilance to manage risk and continue to monitor our Risk Gauges for any sign that it is favorable to become re-invested. With the market indices remaining in negative TSI territory, this also tells us we would be premature to take a risk on approach to the markets.
The table below is a reminder of what we showed a few weeks ago. When the S&P is negative through April, it doesn’t bode well for the full-year performance of the market. Add to this the difficult economic environment as described above, along with a Fed tightening cycle (and reducing their balance sheet), and you have an uncertain environment for risk-on assets.
Neutral
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