Category: Newsletter

The market took a breather this past week as earnings season begins to wind down. Such was expected, as discussed in last week's commentary.

This week's debt downgrade by Fitch sent the media into a tizzy. However, it was just the catalyst needed to start the correction we have discussed over the last few weeks. As noted two weeks ago:

Patience has been hard to come by as stock prices continue trading higher. As shown below, the S&P 500 is set to close out its fifth straight month of gains. In addition to being up six out of the seven months this year, returns are unusually high, with the S&P advancing 18% year-to-date.

Earnings season is underway, and so far, corporate outlooks remain relatively upbeat, suggesting the economic cycle might improve. While it is too early to tell for sure, as we will discuss in more detail today, some evidence may support that view and the potential for the market to eclipse all-time highs by next year.

As we enter Q2 earnings season, we will discuss profits, earnings, and stock market returns in greater detail in the coming weeks. However, the big news this past week was the drop in the CPI inflation gauge, which sent stocks higher, breaking out of the recent trading range over the last couple of weeks.

This week's economic data sent confusing messages through the market. A stronger-than-expected ISM Services number suggests that no recession is on the horizon currently. As noted in the chart below, there has never been a recession since the turn of the century when services (which comprise 80% of the economy) are not in contraction.

Despite the recent correction, complacency remains highly complacent. Last week we noted that the correction had triggered a market sell signal. As stated, when triggered from relatively elevated levels, these sell signals suggest a more protracted correction or consolidation. However, the correction was shortlived as a successful test of the 20-day moving average brought traders back into the market. In a bullish advance, it is not uncommon for buy and sell signals to flip back and forth at elevated levels.

As stock prices continue to push higher, investor and consumer sentiment indexes have also risen. As we will discuss in today's commentary, such should be expected. However, that increase in the sentiment index is also working against the Fed. Such is something Jerome Powell noted this past week during his testimony before Congress. Combined with the Fed's comments that more rate hikes are likely coming, continued weak economic data and persistent inflationary pressures weighed on the markets this week. As noted last week, such was unsurprising.

This bullish market is getting harder to deny as many indicators continue to improve. Last week, we reviewed our previous commentary discussing that the break above resistance would suggest a continued move to our target of 4300.