It will be another busy week for the market, following the disappointing job report on Friday. The numbers on Friday when you looked deeper weren’t all too bad. The government had more than 100k jobs lost during September; meanwhile, the August private payrolls were revised up by around 100k. So ultimately, the miss wasn’t as bad as it would seem. Given that, there wasn’t enough in this report to have the Fed pivot away from its tapering plans at the November FOMC meeting. I went through all of this in this free YouTube video.
Banks
This week will be equally as busy with key CPI and PPI data on Wednesday and Thursday, respectively. Additionally, the big banks will kick off earnings season. Expectations for the big three have been rising heading into this week, with JPMorgan's (NYSE:JPM) earnings estimates rising the most, followed by Citigroup (NYSE:C) and Bank of America (NYSE:BAC). It helps to explain a little bit as to why these stocks have been advancing some in recent weeks. These rising expectations may make it harder for these companies to put up the results needed to push them even higher, the typical buy the rumor, sell the news setup.
S&P 500
The results from these three companies could help shape and set the market’s mood as we push through the week, including any commentary the banks have regarding the economy’s health, which has slowed in recent weeks. This economic slowdown appears to be finally catching up with the S&P 500, which managed to finish the week higher by around 80 bps, but it was anything but smooth or easy.
The market fell sharply to start the week, nearly 1.8%, dropping below that 4,300 level I had noted in last weekend’s commentary, bottoming around 4,280. However, we ended up snapping back and rising the rest of the week to recover those losses. We didn’t quite make it to 4,225 last week, but then again, I wasn’t anticipating such a significant and sharp decline to start the week either.
There is still a pronounced downtrend in the S&P 500 in place, along with a gap at 4,365. This week, given that downtrend, I think we will see the index move lower and fill that gap. Additionally, I happen to believe we will move lower again, back towards 4,300, as we ultimately work our way down to 4,225 over the next week or two.
Dollar
I believe many of the equity market’s problems are coming not from higher rates but a stronger dollar. Since July, it seems as if every time the dollar rises, the S&P 500 struggles. The chart below uses the inverse of the dollar index, and the correlation seems to be too strong to ignore with the S&P 500 futures.
If you don’t believe me, watch the action of the DXY during the week. Watch how the S&P 500 responds as the dollar rises and falls. Another way you can watch is this trade is by using EUR/USD. Every time the Euro strengthens against the dollar, the S&P 500 should rise, and vice versa.
It makes a ton of sense when you think the process through. A strong dollar means that the US is exporting inflation. Any country that buys commodities in US dollars, conducts business in US dollars or finances its debts in US dollars will have higher costs, lowering its economic growth rate and slowing global growth worldwide. In turn, slower growth is a negative for global markets and the US market.
The chart below is of the South Korean KOSPI versus the inverted dollar index.
The following chart is an inverted dollar index versus the iShares MSCI Emerging Markets ETF (NYSE:EEM). I think the relationship is clear.
An interesting thing happened in 2018, with the dollar strengthening all year and oil prices just continually pushing higher. Finally, oil got to right around 80, and the dollar index hit somewhere around 95.50 to 96, and the oil fell off a cliff around October of that year. Pay attention, oil is trading around $80 now, and the dollar index is trading around 94.30.
Exxon
Perhaps Exxon (NYSE:XOM) is a good sign that investors aren’t sure if oil can hold these prices. Despite the recent highs in oil, Exxon has not been able to make a new high. It only needs to get above $65 to break out; I’m not sure it does. Volume levels have been falling in recent trading sessions, suggesting a lack of buying conviction. Meanwhile, the stock is almost over-bought already. I would watch for a drop back to $55 in the coming weeks.
Micron
Micron (NASDAQ:MU) shares continue to hold up around $70, although it seems to be getting closer to breaking down. SK Hynix appears to suggest that Micron break’s $70 and keep heading lower, ultimately settling around $58. My view remains very bearish on this stock.
Amazon
Amazon (NASDAQ:AMZN) has struggled, and one reason is that analysts have been lowering their estimates for the third-quarter results and the full year.
If earnings estimates are going to be coming down heading into results, it will be hard for this stock to lift anytime soon. The trend has been firmly negative for some time, and when the shares tried to get over $3,300 this week, they failed.
I think this stock is heading to $3,200 over the very short term and likely heading to $3,000 over the next several weeks.
Intel
The outlook for Intel (NASDAQ:INTC) is deteriorating, too, with earnings estimates dropping rather materially in recent weeks. It probably helps to explain why the options traders started to place some bearish bets on the stock, as I noted earlier this week.
All it will take is a break of the trendline at $52 to get this stock moving sharply lower, on a path to $47.
Lemonade
Lemonade (NYSE:LMND) has been struggling, and it amazes me just how richly valued this stock still is. A break of support at $58 sets up a drop to $46.
