Summary:
• The stock market was flat last week, with the S&P 500 (SPX) up 1 point to 2768.
• Stocks rallied 2% on earnings optimism but then gave it up after the Trump administration took a step back from Saudi Arabia.
• Our projection is for the SPX to rally and then move to the downside over the coming two weeks, with a target of 2710.
While stocks were flat last week, the nature of the markets has changed, as I pointed out in the latest Market Week show. This is reflected in the CBOE Volatility Index (VIX) which bumped around near 20, after having fell to below 12 earlier this month.
With stocks having declined 4% last week, traders breathed a sigh of relief on Tuesday, pushing the major indexes up over 2%. This was the result of stocks being oversold short-term, and also on positive news from Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), and Adobe (NASDAQ:ADBE).
Stocks then wobbled on Wednesday, after the minutes of the Federal Reserve indicated that, “Participants generally anticipated that further gradual increases for the federal funds rate would most likely be consistent with a sustained economic expansion.”
Another theme last week was the recent gradual decline of the Chinese yuan to just under 7 per dollar. As Treasury Secretary Steven Mnuchin explained, “This poses major challenges to achieving fairer and more balanced trade. We will continue to monitor and review China’s currency practices.
On Thursday, the market took a spill, even with the Philly Fed Manufacturing Index coming in above estimates. The downtick occurred after Mnuchin announced that he would not attend the Future Investment Initiative in Saudi Arabia. This was taken as a sign of the deterioration in the US-Saudi relationship as a result of the recent incident with Jamal Khashoggi.
Secretary of State Mike Pompeo said that Saudi leaders had assured him that they would conduct an investigation that would be, “transparent for everyone to see, to ask questions about and to acquire.” Mnuchin said he would still travel to Saudi Arabia to attend a meeting on combating terrorism financing.
These are some of the factors that are continuing to contribute to our observation that the nature of the stock market has changed. To build upon this, we see rallies continuing to fail, resulting in stronger impulses to the downside versus the upside.
Our approach to technical analysis uses market cycles to project price action. For the coming two weeks, our analysis of the S&P 500 is for stocks to attempt a minor rally, chop around, and then move more strongly to the downside. Our target is the intraday low from the previous impulse lower of 2710. Overall for this week, we expect the SPX to move lower.