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Week Ahead: Investor Optimism To Drive Stocks Up Even As Grim Data Continues

By Investing.com (Pinchas Cohen/Investing.com)Market OverviewMay 31, 2020 07:29AM ET
www.investing.com/analysis/week-ahead-investor-optimism-to-drive-stocks-up-even-as-grim-data-continues-200526216
Week Ahead: Investor Optimism To Drive Stocks Up Even As Grim Data Continues
By Investing.com (Pinchas Cohen/Investing.com)   |  May 31, 2020 07:29AM ET
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  • Stocks have been climbing on the hope of a V-shaped recovery amid the promise of infinite QE, even as the Fed itself said that wouldn’t be enough
  • Treasurys advanced Friday, together with equities–a potential sign of a pullback
  • The USD may rally before continuing lower, allowing gold to move higher

The only thing investors appear to be seeing is the light at the end of the lockdown tunnel, as economies around the world continue reopening and government regulators keep issuing unprecedented amounts of fiscal easing, even as equity bulls turn a blind eye toward ongoing, devastating economic data and the revival of US-China tensions.

The S&P 500 Index climbed 0.5% on Friday, finishing the week 3% higher—a second consecutive weekly advance for a total of +6.3%. It also marked a monthly acceleration for the SPX just a hair under 5% and the second straight monthly gain for a total of 17.8%, the best two-month performance for the index since 2009.

Still, not all the news last week was encouraging. US GDP dropped at an annualized rate of -5.0% in the first quarter, the worst performance for this metric since the last quarter of 2008, when the US was in the midst of the great recessionary storm, during which six years of continuous growth collapsed. And some version of history could be repeating now. Fed Chair Jerome Powell, in a televised interview, told "60 Minutes," growth could shrink another 30%.

As well, in early April, the IMF predicted “the worst downturn since the Great Depression." Indeed, personal spending plunged a record 13.6% in April

Investor Exuberance, Grim Economic Data

But all that doesn’t seem to concern equity bulls. While only two weeks ago the Fed warned of a slow recovery, with “significant” financial vulnerabilities, in which asset prices could suffer without yet more virus relief from the government, traders still aren't looking back, barreling past some of the worst economic data any of us have seen in our lifetimes. And analysts expect "more shocking economic data in the week ahead," with many anticipating the US unemployment rate will have neared 20% in May.

All told, the S&P 500 catapulted a whopping 36% higher since the March 23 bottom, even with the month-long lethargy shown in the sideways move from mid-April to mid-May.

SPX Daily
SPX Daily

To be honest, we’re a bit self-conscious about predicting that stocks could be headed lower, when prices repeatedly keep blowing out what look to us like bearish patterns. Most recently, the S&P 500 blew out a small H&S pattern and continued making new highs after seemingly completing rising wedges.

In fact, the price may still be forming a much larger H&S top, in which our initial, small H&S makes up its left shoulder. (Note that a H&S pattern normally takes 3 to 9 months to evolve.)

Also, the SPX is still forming a rising wedge. The small H&S’s neckline could serve as the larger H&S neckline. Finally, a fall below that may demonstrate that such a wedge breakout would be for real.

So why do we continue entertaining these pessimistic ideas—aside from the horrible data and macroeconomic risks? We can't help but be influenced by the persistently low Advance / Decline Line. This signals that the index acceleration we're seeing isn't equally represented across market breadth.

After a short spike nearly two weeks ago, the Advance / Decline line demonstrates that the broader market returned to the depressed levels seen since the initial dead-cat bounce back in late March.

Having pointed out this significant piece of negative technical information, we have to ask bullish investors: is this stock market advance sustainable? And are investors right to expect a V-shaped recovery? Is it worthwhile taking for granted that the government will deliver the fiscal package the Fed warned is necessary to help the country snap out of a prolonged, painful economic slump? And is it rational to expect that QE can replace a real economy and prop up stocks for the long run?

And we haven't even started talking about a potential cold war between the world’s two largest economies yet. That grim development hasn't cast a shadow on investors’ sunny optimism either. Clearly, investors are counting on more room for stocks to rise according to the ratio between liquidity and price.

Yields, including for the 10-year Treasury benchmark, fell to a two-week low on Friday, demonstrating increased demand for Treasurys, even while stocks advanced.

UST 10Y Daily
UST 10Y Daily

From a technical perspective, however, rates may have found support at last week’s hammer within a rising channel.

The dollar fell for a second day as the trading week drew to a close, breaking through the floor of a range that we found perplexing.

DXY Daily
DXY Daily

It seems the downside breakout followed the last move before the congestion, a 4.5% drop within the six days before the symmetrical triangle. While the price did provide a downside breakout, with a close below the 200 DMA to boot, note that the hammer’s close was above the March 27 lows, which started the pattern. This may signal a return move.

The dollar weakness boosted gold.

Gold Daily
Gold Daily

The precious metal was released from a possible falling flag, completing a return move to both the preceding symmetrical triangle and an even earlier H&S continuation pattern as it enlarges the symmetrical triangle.

Bitcoin gained for the week.

BTC/USD Daily
BTC/USD Daily

The crypto currency rose within a symmetrical triangle, as it struggles to break free of the long-term downtrend since the June high. The continuation pattern is supported by the 200 DMA, making the case that the uptrend since the March low will have the last word.

Crude oil rallied late and posted its biggest monthly advance on record.

Oil Daily
Oil Daily

The commodity finishing halfway through to $36 a barrel, for the first time since March 6. The top of the falling gap posted on March 9 is a presumed resistance, at $41. Meanwhile, Friday’s advance may be the completion of a flag, though we would have considered it a more potent signal had the range tilted downward. That would have strengthened the scenario that all the supply has been exhausted.

Week Ahead

All times listed are EDT

Sunday

21:45: China – Caixin Manufacturing PMI: seen to remain flat at 49.6.

Monday

Germany, Switzerland, and New Zealand markets closed for holidays

3:55: Germany – Manufacturing PMI: likely to be 36.8 from 36.8.

4:30: UK – GDP: expected to edge up to 40.7 from 40.6.

10:00: US – ISM Manufacturing PMI: likely to rise to 43.0 from 41.5.

Tuesday

00:30: Australia – RBA Interest Rate Decision: the central bank down under is expected to hold rates steady at 0.25%.

21:30: Australia – GDP: anticipated to fall to -0.3 from 0.5% QoQ.

Wednesday

3:55: Germany – Unemployment Change: forecast to fall to 195K from 373K.

4:30: UK – Services PMI: expected to edge higher to 28.0 from 27.8.

8:15: US – ADP Nonfarm Employment Change: predicted to fall to -9,000k from -20,236K.

10:00: US – ISM Non-Manufacturing PMI: likely to climb to 44.0 from 41.8.

10:00: Canada – BoC Interest Rate Decision: forecast to remain steady at 0.25%.

10:30: US – Crude Oil Inventories: expected to drop to -1.944M from 7.928M.

21:30: Australia – Retail Sales: seen to plunge to -17.9% from 8.5%.

Thursday

4:30: UK – Construction PMI: anticipated to surge to 30.0 from 8.2.

7:45: Eurozone – ECB Monetary Policy Statement and Interest Rate Decision: rate forecast to remain flat at 0%.

Friday

8:30: US – Nonfarm Payrolls: expected to come in at -8,250K for May from -20,500K in April.

8:30: Canada – Employment Change: likely to have dropped to -500.0K in May from -1,993.98K in April.

Week Ahead: Investor Optimism To Drive Stocks Up Even As Grim Data Continues
 

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Week Ahead: Investor Optimism To Drive Stocks Up Even As Grim Data Continues

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Comments (15)
Zachary Buszta
Zachary45 May 31, 2020 8:30PM ET
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We might be green tomorrow, and Friday, and Wednesday,
Emanuel Dabah
Emanuel Dabah May 31, 2020 4:48PM ET
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We all know the true....  the true is that all indexes should be 50% down  About the true  It has 3 features  1 it always reveal  2 it reveal with trauma  3. The longest the time it take it to reveal the bigger the trauma  I am sure about one thing it will happen with the FED without the FED  and will take uss all to ***hall  That why I own farm far away from all cities  Take care
Tan Kok Teong
Tan Kok Teong May 31, 2020 4:48PM ET
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The public get to pay for the unlimited printing of USD - but they are not getting richer but with more debt. Hope this is not the reason of their pain
Kevin Wickins
Kevin Wickins May 31, 2020 3:13PM ET
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Hi Pinchas, yes Head maybe early this week on Jund 2nd but after down till wednesday/Thursday for the  unemployment  numbers and jobs report.  Might touch 3100 on June 1/2 before heading down.
Sean Livingstone
Sean Livingstone May 31, 2020 2:24PM ET
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There are too many bears for us to correct in a big way. Maybe small ones to clean up some fomo.
Mark Lingenfelter
Mark Lingenfelter May 31, 2020 1:13PM ET
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You may want to take this into consideration: Rioters are looting and burning major US cities!
Pinchas Cohen
Pinchas Cohen May 31, 2020 1:13PM ET
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Sorry, this is a small blip among the themes I discussed.
Robert DZ the patterns
Robert DZ the patterns May 31, 2020 1:11PM ET
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Necklines, heads and shoulders, wedges, legs, gaps, what a lethany of nonsense. Markets will do what the Fed will allow it.
John Quinn
John Quinn May 31, 2020 1:11PM ET
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I happen to be a big believer in patterns, but not because they're magical.  The better ones provide very active trendlines to trade around as price destinations.Other than that, if you told me you traded a wedge/triangle/any pattern breakout and you made so much money because it hit its measured target perfectly, I'd probably say you imagined it.  But the FED is very real and its hand has definitely been felt
Pinchas Cohen
Pinchas Cohen May 31, 2020 1:11PM ET
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John Quinn  Patterns are not magical. They are behaviors of supply and demand. Nothing is perfect in an imperfect world. There are no absolutes - in no field, so why should there be in trading? One manages one's trades and goes with the flow.
John Quinn
John Quinn May 31, 2020 1:11PM ET
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Pinchas Cohen  lol -- yes Pinchas, I am well aware of the above.  However, after trading S&P chart patterns for the better part of 5 years my opinion is that in a bull market, bearish patterns have a high failure rate.  And in a bearish market, bullish patterns tend to have a high failure rate.  Also, in my experience swing trading, I've noticed the trend lines that create the patterns are far more useful and profitable when you look at them as price destinations rather than try to play them as breakouts.
Pinchas Cohen
Pinchas Cohen May 31, 2020 1:11PM ET
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Emile Goffas  thank you for your comment.  (1) I am NOT bullish in one article and bearish in another.  I have been consistent in my view over periods of time. I provided my entire thought process. I did NOT know whether the stocks will go up or down in those periods. I discussed the likelihood of that. I have openly shared my inner-turmoil - conflicts, hesitations and second-guessing myself. (2) Accountants and doctors do NOT follow facts. The "fact" is they disagree on just about anything. I would think you would see that amid the Corona. They follow interpretive fact. (3) "Analyses" are accurate or not, irrespective of the outcome. Think about that for a bit. (4) If you're tired of the articles for "we" or otherwise, I suggest you take a rest. I am an analyst for Investing.com and they get behind my opinions, just like a company would get behind its accountant's interpretation of a tax rule or its  lawyer's interpretation of the law.
Etienne Schoen
Etienne Schoen May 31, 2020 1:11PM ET
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- of course you can defend your job, and generally your might be right. However, at current you analyse not anymore a free stock market, where prices are fixed by supply and demand, and behaviour of a big sum of participants, but a place where one actor sets the prices - FED. Consequently, any analysis of such is a loss of time. FED dictates independently the prices and ignores the rest. So it has nothing to do with behavioral investment or fundamental investment. Everything is set by FED. So, I am sorry to say ... analysts are useless at the given time and can fill unemployment.
John Quinn
John Quinn May 31, 2020 1:08PM ET
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159094465221870.jpg
There are 2 necklines I've been watching.  One is more symmetrical than the other.  Both have been developing for the proper amount of time.  The shoulders are easier to define on the ES futures chart I use for some reason, but they're still visible enough on the attached chart.
Pinchas Cohen
Pinchas Cohen May 31, 2020 1:08PM ET
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Sorry, John, there is no inverted H&S in this chart.
John Quinn
John Quinn May 31, 2020 1:08PM ET
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Pinchas Cohen  https://www.fxempire.com/forecasts/article/sellers-got-cot-in-a-trap-sp-500-dax-and-eur-gbp-analysis-649802 Don't take it from me.  A quick google search turned up the FXEmpire article which mentions the SP Inverse HS.  And also here http://thepatternsite.com/Blog.html written by Thomas Bulkowski, who seems to have written the bible on chart patterns.  He's looking at the DOW in this particular article, and the DOW's daily since since Jan has been a near carbon copy of the S&P.
John Quinn
John Quinn May 31, 2020 1:08PM ET
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Pinchas Cohen  Do you see it yet?
John Quinn
John Quinn May 31, 2020 12:44PM ET
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Great write up, as usual. Good catch on the Advance Decline. I do disagree with your characterization of this current S&P rally as a dead cat bounce. We haven't really come close to retesting the March lows, and barring another complete shutdown of the economy again it's looking less and less likely that we will.  As far as the bearish HS patterns that have been failing, I believe that's just a result of the common tendency for bearish patterns to fail in a bull market just like bullish patterns fail more often in a bear market.  The one pattern you might have missed is the massive Inverted HS pattern that's been in play since its neckline was breached and vigorously retested between Arp 27-mid May.  In success that pattern would complete around 3600.  You are correct, the data doesn't support this kind of target in the near term.  But since when has this market been rational?
Pinchas Cohen
Pinchas Cohen May 31, 2020 12:44PM ET
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Hey John, thanks for the in depth comment. I so much missed the inverted H&S pattern, that I still don't see it. How can a two-week pattern be characterized as "massive?" A bonafide H&S takes 3-9 months to develop.
John Quinn
John Quinn May 31, 2020 12:44PM ET
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Pinchas Cohen  see reply, I attached a chart
Quique Mac
Quique Mac May 31, 2020 12:16PM ET
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it's not optimism. it's self-interest. let's keep him in power, keep our money. who cares about the rest?
Pinchas Cohen
Pinchas Cohen May 31, 2020 12:16PM ET
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The market is the sum total of all investors.
Robert DZ the patterns
Robert DZ the patterns May 31, 2020 12:16PM ET
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Fed is the biggest investor, the Fed tops over W. Buffett a thousand times.
Sergio Sixteen
Sergio Sixteen May 31, 2020 11:38AM ET
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Hi Pinchas. Thanks for your articles. I very much agree with your points. Don't you find VIX beahviour weird? Actually it's not dorpping much being at levels of 2018 fall.
Pinchas Cohen
Pinchas Cohen May 31, 2020 11:38AM ET
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You're welcome, Sergio.I don't know about weird, but I did notice that. Look, I can't expect the VIX to fall to a time when stocks roared with headwinds that were a joke compared to the worst pandemic in 100 years and the worst data in 70 years.
Henry Main
Henry Main May 31, 2020 11:14AM ET
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I especially like this article because i own calls
Pinchas Cohen
Pinchas Cohen May 31, 2020 11:14AM ET
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Happy I made you feel good about your call to own calls.
Cos Delli
Cos Delli May 31, 2020 9:39AM ET
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Great write up
Pinchas Cohen
Pinchas Cohen May 31, 2020 9:39AM ET
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Appreciate it, Cos
Game Lover
Game_Lover May 31, 2020 9:36AM ET
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Very useful analysis.
Pinchas Cohen
Pinchas Cohen May 31, 2020 9:36AM ET
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Thanks, pandemicpanic
Ahmed Alaraj
Ahmed Alaraj May 31, 2020 9:20AM ET
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Thanks PinchasAll headge fund wating for proper timing to withdraw everything, and it's soon, the market is fake purely
Pinchas Cohen
Pinchas Cohen May 31, 2020 9:20AM ET
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You're welcome, Ahmed!
Cesar Valenzuela
Cesar Valenzuela May 31, 2020 8:21AM ET
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Great analysis 👍🏼
Pinchas Cohen
Pinchas Cohen May 31, 2020 8:21AM ET
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Hail Cesar!
Pinchas Cohen
Pinchas Cohen May 31, 2020 8:21AM ET
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Zeeshan Afridi
Zeeshan Afridi May 31, 2020 8:21AM ET
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Pinchas Cohen thanks your great main
 
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