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Week Ahead: Stocks To Continue Climbing On Ongoing Easing; USD At Crossroads

By Investing.com (Pinchas Cohen/Investing.com)Market OverviewMay 09, 2021 08:27AM ET
www.investing.com/analysis/week-ahead-stocks-to-continue-climbing-on-ongoing-easing-usd-at-crossroads-200578685
Week Ahead: Stocks To Continue Climbing On Ongoing Easing; USD At Crossroads
By Investing.com (Pinchas Cohen/Investing.com)   |  May 09, 2021 08:27AM ET
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  • Investors are back to cheering for a bad economy, as it enables additional stimulus
  • Gold gains on dollar weakness, safe haven

The S&P 500 and Dow Jones Industrial Average hit new all-time highs on Friday, while the NASDAQ and Russell 2000 both pushed higher after the April Nonfarm Payrolls release printed considerably below expectations, allaying inflation concerns and signaling that Fed easing will likely remain in play. As such, we expect stocks to continue moving higher, as traders cheer ongoing stimulus.

However, we also anticipate considerable whipsawing in the medium-term, as potentially conflicting data will remain a factor, causing experts to continue arguing about the possibility of rapidly rising inflation and the economy overheating.

The dollar plunged and gold moved higher, penetrating more deeply into the $1800 level.

Bad Economy, Positive For Investors?

Ten of the S&P 500's 11 sectors finished in green territory, while Consumer Staples ended flat. Energy, (+1.8%), Real Estate, (+1.2%) and Industrials, (+1.1%), outperformed.

Energy, in fact, opened -1.2% lower in early trading, while the Tech sector opened 0.8% higher, after the much-lower-than-expected employment numbers shocked markets. The payrolls increase of 266,000 was significantly below the 1 million new jobs forecast. President Joseph Biden's reacted to the release by saying of a full US economic recovery, "the climb is steep and we still have a long way to go."

After the report, investors quickly shifted funds into areas that provided superior performance during the pandemic while dumping shares that outperform during an economic recovery, including energy stocks. However, after falling sharply at the open, Energy went on to have a stellar day, finishing up almost twice as much as the next-best performer. Technology stocks, on the other hand proceeded to trim gains as the day wore on, or even slump into the red.

The market narrative is that the disappointing employment data supports the view that inflation is transient and therefore not expected to impede the recovery. It also boosts the notion that a slow economic recovery will merit continued fiscal and monetary support from government agencies. With that in mind, investors backtracked and returned to the Reflation Trade.

As we've pointed out repeatedly, in an alternate, QE-driven environment (such as the one we're currently experiencing), a bad economy is viewed as positive for investors, since they'll continue to enjoy a market with easy pickings as stimulus keeps stocks bouyant, while positive data, which sounds the alarm for tightening, is met with disdain.

By advancing on Friday, the S&P 500 may have reversed a bearish pattern.

S&P 500 Daily
S&P 500 Daily

The gains took the index above what would have been a small H&S top, rebounding off the short-term rising channel, keeping a higher rate of ascent than the long-term uptrend line since the 2020 bottom.

With consumer spending a whopping 70% of US GDP, jobs are a crucial cog of the American economic machine. That’s why the monthly NFP data release has such a strong impact on the market. However, such reactions tend to be short-term.

More significantly, inflation concerns remain a central theme driving markets. But since it's an ongoing, fluid statistic, it requires a number of reads to demonstrate a trend. Considering that Initial Jobless Claims, which are forward looking, fell this past week to the lowest level since the onset of the coronavirus pandemic, no downtrend for jobs creation has been established.

Since the end of March, investors continue going back-and-forth on their outlook for inflation. This manifests precisely on the chart for Treasury yields, including for the 10-year benchmark.

UST 10Y Daily
UST 10Y Daily

Rates topped out on Mar. 30, completing a double top. This reasserted its resistance upon a return move. Friday’s trading developed a powerful bullish hammer, but it’s at the bottom of the current falling channel, as it meets with an earlier rising channel.

This standoff between support and resistance in yields aptly reflects the internal conflict of the market concerning the outlook for inflation and interest rates.

The shift in outlook pushed the dollar below its Apr. 29 low, as it closed beneath its uptrend line from the Jan. 6 bottom.

Dollar Daily
Dollar Daily

Selling was represented by the smaller rising wedge; it's going up against the much larger falling wedge since the 2020 peak. The unanswerable question right now, of course, is which will ultimately win?

Gold climbed, as rate hikes seemed further away, and the USD weakness made the dollar-denominated yellow metal cheaper.

Gold Daily
Gold Daily

However, the precious metal found resistance at the top of its falling channel since the March peak, joined by the 200 DMA. Having realized the double bottom and two subsequent bullish flags over the short-term, the expectation is for a continued downtrend. This view is the mirror image of the dollar retesting its bottom.

Bitcoin rose Friday and Saturday, even as another politician called for government intervention into the digital currency and its peers. On Sunday the largest cryptocurrency by market cap reversed and is falling at time of writing.

BTC/USD Daily
BTC/USD Daily

Last week we provided a bearish call on Bitcoin, saying it could halve in value, perhaps as quickly as in three months. The current decline confirms the resistance to Monday’s shooting star.

Oil is expected to resume its rising channel after a cyberattack, reported on Friday by privately held Colonial Pipeline, halted operations on “a major pipeline system that transports 45% of fuel across the East Coast."

Oil Daily
Oil Daily

The immediate crisis could become the trigger to help prices finally breach the Mar. 8, $67.98 high, the highest level for WTI since October 2018. Till now, momentum has been weakening, providing a negative divergence.

Week Ahead

All times listed are EDT

Sunday

21:30: Australia – Retail Sales: seen to remain flat at 1.4%.

Monday

21:30: China – CPI: to rise to -0.2% MoM from -0.5% previously.

Tuesday

5:00: Germany – ZEW Economic Sentiment: expected to edge higher to 71.0 from 70.7.

8:00: US – EIA Short-Term Energy Outlook

10:00: US – JOLTs Job Openings: predicted to rise to 7.500M from 7.367M.

Wednesday

2:00: UK – GDP: forecast to drop to -1.7% from 1.3% QoQ, but to climb on a YoY basis to -6.0% from -7.3%.

5:00: UK – BoE Gov Bailey Speaks

8:30: US – Core CPI: anticipated to hold steady at 0.3%.

10:30: US – Crude Oil Inventories: seen to catapult to -2.346M from -7.990M.

Thursday

8:30: US – Initial Jobless Claims: predicted to edge higher, to 540K from 498K.

8:30: US – PPI: expected to retreat to 0.3% from 1.0%.

Friday

7:30: Eurozone – ECB Monetary Policy Statement

8:30: US – Core Retail Sales: seen to plummet to 0.9% from 8.4%.

8:30: US – Retail Sales: expected to drop to 0.2% from 9.7%.

Week Ahead: Stocks To Continue Climbing On Ongoing Easing; USD At Crossroads
 

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Week Ahead: Stocks To Continue Climbing On Ongoing Easing; USD At Crossroads

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Comments (14)
Adam Paine
Adam Paine May 10, 2021 1:01AM ET
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charts don't matter anymore, wake up
Adam Paine
Adam Paine May 10, 2021 1:01AM ET
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and I mean that in the most endearing way :)
Pinchas Cohen
Pinchas Cohen May 10, 2021 1:01AM ET
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Thanks for the wake up call. You don't undersatnd charts. They are a visual representaton of what is and are statistically predictable based on repeated human behavior. But thanks for the education.
Adam Paine
Adam Paine May 10, 2021 1:01AM ET
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Fundamentals died with QE. The game has changed. Think about when QE is pulled, or interest rates go up? Will charts matter? How do you chart GME? Or how about GM...factories closing, CEO sells large anount of stock but still at near ATH? Markets have no consiounce for people out of work...they're just "lazy". But 120 Billion a month for QE is justified??? I respect your charts and want to believe in the magazine but qt this point our markets make 0 sense. Unless you want to jump on the bandwagon of justification
Javi MV
Javi MV May 10, 2021 1:01AM ET
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I also read charts but I believe you have a point here. Look at today’s bloodbath, markets on the red although your charts reading was great. Volatility is the new age, charts up and down with no direction and all sorts of strange shapes. I agree on this one, charts matter less than in the good old days.
William Bailey
William Bailey May 10, 2021 12:15AM ET
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I’m lovin it , hes right , the markets are cheering on bad news cause they believe free debt cash is coming to save stocks!!! Greed! Problem is the Fed cant continue to hamd over free cash debt , or risk stalling the economy/ collapse the financial system when assets do implode and banks fail !!! Go abead , print more and destroy it for everyone
NUNO LOUREIRO
NUNO LOUREIRO May 09, 2021 2:44PM ET
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I remember to read that this bad NFP was because many people are still at home due to schools and day-care are still closed, so it seems the jobs are there, but some people are not interested in applying for now, how come is this a sign that economic recover is slow?For me is a sign that excess in stimulus could in fact, slow the recover because is provoking a shortage in labor and the company's will have difficulty in hiring people.
Pinchas Cohen
Pinchas Cohen May 09, 2021 2:44PM ET
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Absolutely
Adam Paine
Adam Paine May 09, 2021 2:44PM ET
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QE is also the culprit. not just "stimy" checks. We need to stop easing for all. Not only the less fortunate...
hd tv
hd tv May 09, 2021 12:02PM ET
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with the government umployment support so high could it be argued that until its removed it artificially putting the economy closer to full employment than the figures show and putting more pressure on inflation than intended?
Pinchas Cohen
Pinchas Cohen May 09, 2021 12:02PM ET
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It could be argued.
William Bailey
William Bailey May 09, 2021 12:02PM ET
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Nah, the Fed is out of options for printing .... its over for the markets due to an inability to support it . Does anyone think the Fed can/will print the 6 trillion in debt in the next 12 months to maintain the markets and drive bond yields to the moon?
Arjan Lalwani
Arjan Lalwani May 09, 2021 11:27AM ET
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Up, 4/5 days targets 1744+1756+1788.
Amie Inconnue
Amie Inconnue May 09, 2021 11:23AM ET
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Thank you, Pinchas, you help me to see patterns and underlying reasons in seemingly erratic market behaviour. Do you understand what silver is doing? It's less clear than gold because it seems that silver is supposed to profit from inflation and reflation alike, but it's mostly trading sideways?
Pinchas Cohen
Pinchas Cohen May 09, 2021 11:23AM ET
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First, I don't claim to undrestand. I surmise. Second, the market is still stuck with this conflict. Maybe only when the picture will clear, so will silver's trend.
Ijaz mughal
Ijaz mughal May 09, 2021 10:30AM ET
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10 the may gold will up or down?
Pinchas Cohen
Pinchas Cohen May 09, 2021 10:30AM ET
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I don't know.
Putu Pramana
Putu Pramana May 09, 2021 9:52AM ET
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so thats mean USD would be inflation this week?
Pinchas Cohen
Pinchas Cohen May 09, 2021 9:52AM ET
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It means the opposite
عبدالجبار شیرمحمدلی
عبدالجبار شیرمحمدلی May 09, 2021 9:36AM ET
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tabrez khan
tabrez khan May 09, 2021 9:36AM ET
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hlo
Vaqif Huseynov
Vaqif Huseynov May 09, 2021 9:34AM ET
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salam
Asim Hasnain
Asim Hasnain May 09, 2021 9:21AM ET
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sir do u think NG price will also be effected due to cyberattack on pipeline
Pinchas Cohen
Pinchas Cohen May 09, 2021 9:21AM ET
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Of course
Olawoyin Quadry
Olawoyin Quadry May 09, 2021 9:08AM ET
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Hello
Randolph Russ
Randolph Russ May 09, 2021 9:05AM ET
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Cohen asleep on crypto!!!
Pinchas Cohen
Pinchas Cohen May 09, 2021 9:05AM ET
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Investing in crypto now should be in every wise individual list, in some months time you will be ecstatic with the decision you made today.
Amir Shahzad
Amir Shahzad May 09, 2021 9:05AM ET
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Hllo
touseef ahmed
touseef ahmed May 09, 2021 9:05AM ET
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