2023-05-01 12:23:07 ET
Summary
- The Fed meeting is in a few days, and the stock market is flirting with multi-month highs.
- If the Fed sets the right tone and doesn't get too hawkish on the conference call, many stocks could enjoy more upside.
- Moreover, many companies are delivering much better than expected earnings results, providing a positive catalyst for stocks as we advance.
- However, there's concerning economic data as the consumer struggles and the labor market worsens.
- Stocks could move higher in the near term, but I'm preparing for more volatility as the "Sell in May and Go Away" could prove a wise saying this year.
The Fed meeting is almost here, and the stock market is around a crucial inflection point. Many stocks could move higher if the Fed doesn't raise rates or is relatively dovish on its conference call. Also, many companies are providing much better earnings and revenues than analysts had expected.
However, there are concerning factors and uncertainty regarding the economy as we advance. Economic data is worsening as the consumer struggles. Furthermore, the labor market is showing signs of weakness. While there could be more upside for stocks in the near term, "sell in May and go away" may be a wise term to use this summer.
SPX: 1-Year Chart
The S&P 500 SPX ( SP500 ) is around its crucial resistance level at 4,200. A move above this critical zone would likely elevate the SPX to 4,300 quickly and possibly higher after that. We see several bullish technical factors converging here. First, the SPX is on the verge of breaking above crucial resistance, and with the RSI at only around $60, it's not overbought. Moreover, we see a series of higher lows and higher highs. Furthermore, the 50-day MA just crossed the 200-day MA, and the full stochastic and other technical indicators point to more upside and positive momentum in the near term.
However, we must consider a potential reversal if the SPX stalls, getting rejected at the 4,200 level. We will look for crucial support around the 4,100 - 4,050 level in this scenario. The ultimate near-term support point comes around 4,000-3,980, and if the SPX drops below here, we're likely looking at a retest of 3,500-3,800 or worse.
Yes, but what about fundamentally? You Say
Well, Most Earnings Look Good
Right off the bat, we saw stellar results from some high-profile names. Big banks like JPMorgan ( JPM ), Wells Fargo ( WFC ), and many other big companies surpassed consensus earnings estimates significantly, illustrating the excellent resilience of corporate America.
How about those tech results?
Tech earnings have blown away depressed consensus estimates on the street. Microsoft ( MSFT ), Alphabet ( GOOG ), ( GOOGL ), and many other market-leading tech companies beat top and bottom line estimates. Therefore, we've either seen the bottom in the earnings recession, or there may be a second dip ahead. However, many tech stocks likely bottomed in mid-October, and we may not see such steep discounts if a second downturn materializes. Also, we have more big names reporting this week, including Apple ( AAPL ), Qualcomm ( QCOM ), AMD ( AMD ), and others.
What about the data?
We've got a lot of red on the screen here, and that's not a good thing, except in the CPI's case. Manufacturing continues its contraction, with numbers coming in lower than expected. Also, the employment picture is worsening, with ADP and non-farm payrolls coming in lower than anticipated. Housing and building data also is down, far more than expected in many cases, illustrating that the real estate market may continue struggling as we advance. Furthermore, retail sales were down 1% MoM, worse than the anticipated 0.4% estimate. As the consumer and labor market indicators continue worsening, the market may find it challenging to run higher without an assisting hand from the Fed.
What's the Fed saying about all this?
The FOMC meets this week, and there's about a 92% that the Fed will raise the funds rate by another 25 basis points, bringing the benchmark rate to a very high 5-5.25%. There's about an 8% probability that the Fed won't move rates. However, this scenario is unlikely but would be highly bullish for stocks and other risk assets. However, the market is pricing in a 25Bps move, and while we could see a sell-the-news type event, there probably won't be an overly adverse reaction unless the Fed strikes a hawkish tone during its press conference.
The Bottom Line: Here's What Could Happen
The Nasdaq 100: 4-hour Chart
Tech stocks have led the recent rally, but many top tech stocks have appreciated significantly off their bottoms, and the market remains vulnerable. Therefore, I watch the Nasdaq 100 as a leading stock market index. If the Nasdaq 100 can break above the critical 13.3-13.5K range, it opens the door, for now, to highs around 14K and possibly higher. However, we must remain vigilant as a reversal is possible. Therefore, I'm watching the 13-12.8K level and will reduce risk while increasing hedges if the market falters and heads lower.
While there should be more upside in the near term, many stocks have gotten overheated. Moreover, The FOMC meeting is coming up, and the Fed may not be as accommodating as the market wants. Therefore, we may see a more significant than anticipated selloff after this week's FOMC meeting. Additionally, despite mostly better-than-anticipated corporate results, some companies provided cloudy guidance, and the earnings recession could continue for many names in the coming quarters.
Also, have you seen the data recently? Suppose the labor market, the consumer, and other crucial segments of the economy continue worsening. In that case, the market will likely throw a temper tantrum, and the SPX, Nasdaq 100, and other major stock market indexes may drop to recent or even new lows. My bear market bottom target range remains around the 3,200-3,500 level, and my year-end target is around 4,600 in the SPX.
For further details see:
The Breakout Is Coming: Why I'm Selling In May