Investors may be put off in the coming week from the vicious sales cycle that has gripped the stock market since the end of March.
Shares jumped off Thursday’s leaching low and were set to leave the week with reduced losses following Friday’s rally. Buyers on Friday chased great deals among small caps, biotechnology names, Arkk Innovation ETF and other growth names that were hardest hit.
The S&P 500 jumped back above the key level of 4,000 on Friday, after touching 3,858 on Thursday – near the range of 3,800 to 3,850, which chart analysts have targeted after a bottom. But even though it looks like the market may jump temporarily, market technicians say this zone is likely to be tested again later.
“Does that mean this year’s lows are in? Probably not, but it could create an oversold boost back to test the 4,100 or 4,200 level of the S&P 500,” said T3Live.com’s Scott Redler, who follows the market’s short-term technicals. “At bull markets you get weeks when you pull in. At bear markets you get oversold rejections.
Redler said he expects dealers will try to sell the rally. On Friday, the Nasdaq rose 3.8%, though it was down 2.8% for the week, and the Dow was up 1.5%, but down 2.1% for the week. The S&P 500 ended Friday at 4,023, an increase of 2.4%, but dropped the same amount for the week.
“It has the ingredients for an oversold bounce that can last more than a week. I think this bounce will be led by all the oversold names that have dropped 70% to 80% from their heights,” he said. “That does not mean you can blindly buy. Not everything is created right in this springboard.”
Redler said the fact that the Federal Reserve will not meet for a few weeks could add some support to the shares. Markets have been nervous that the Fed will raise interest rates too quickly and stifle the economic recovery as it tries to stave off hot inflation.
In the coming week, investors will continue to look for clues about the course of the central bank’s rate hike in both economic reports and comments from Fed officials.
Fed Chairman Jerome Powell is scheduled to speak at a Wall Street Journal conference on Tuesday afternoon. So far, the market expects an interest rate hike of half a point at the June meeting and another in July, possibly a third in September. The central bank raised its Fed funds target rate by half a point this month after rising by a quarter of a point in March.
Consumer health will be a major focus in the coming week. The financial calendar includes April retail sales and also a look at the housing sector, with the National Association of Home Builders survey; Both reports are set for release on Tuesday, with home sales coming on Wednesday and existing home sales on Thursday.
Walmart, Home Depot and Target are set to report earnings next week, and of these, large chain stores can provide a good insight into the impact of inflation on consumer spending and attitudes.
Almost a bear market
Perhaps the most telling thing for investors in the coming week will be how the stock market trades after their efforts to return on Friday.
The S&P 500’s fall to 3,858.87 on Thursday took the index down 19.55% from its highest on an intraday basis – very close to the official fall of 20% for a bear market.
The relentless rise in bond yields also slowed after the 10-year yield peaked last week at 3.2%. The 10-year-old was at 2.93% on Friday.
“I think what’s most encouraging to me is that the interest rate route has stopped. Throughout the year, short-term returns have pushed up 10-year interest rates,” says Jim Paulsen, investment strategist at Leuthold Group. He noted that inflation expectations in the bond market have also fallen and the reduced pressure from the fixed income market may help equities rise. Interest rates move opposite to market prices.
Fairlead Strategies founder Katie Stockton said the slowdown in the 10-year dividend increase is important. For the broader economy, a 10-year maturity of around 1.5% at the start of the year has already had an impact on housing, as home loans are affected by it.
For equities, technology and growth names have been most affected by higher government interest rates. This is because higher prices make money more expensive, and cheap money is the fuel for high-value stocks.
“I think the 10-year dividend will just be stopped here,” Stockton said, noting that her view is based solely on chart analysis. “Such a steep upward trend is unsustainable … We believe there will be consolidation in government bonds and the dollar.” She said support for the 10-year-old is at 2.55% and upward resistance is at 3.25%.
Paulsen noted that much speculation has been aroused from high-flyers and big cap technology. “Look at the FANG stocks going from 14% of market value to 9%. A lot of the technology is done,” he said.
Investors also saw Apple last week after it broke support to $ 150. The stock has an overall impact on the market as it is the largest US company by market value and is part of the Dow, S&P 500 and Nasdaq.
Apple stock fell just below Stockton’s target of $ 139 on Thursday, but recovered on Friday and closed at $ 147.11 per share.
Stockton said her chart analysis signals the market could see about two weeks of stabilization, either with a jump or sideways. “It’s not a buy signal. I do not recommend people to buy.”
There may be an oversold bounce, “and we generally plan to use the oversold bounce to reduce the exposure,” she said.
Her downside S&P 500 goal had been 3,815, and she said it’s still in play. “We have to assume it will be a genetic test,” Stockton said. “The genetic test has a greater chance of causing a breakdown because the momentum is still to decline.”
Week ahead calendar
Earnings: Warby Parker, Take-Two Interactive, Tencent Music, Ryanair, Weber
8:30 Empire State production
8:55 New York Fed President John Williams
Earnings: Walmart, Home Depot, Vodafone, JD.com
8:00 St. Louis Fed President James Bullard
8:30 Business statements
9:15 Philadelphia Fed President Patrick Harker
9:15 Industrial production
10:00 Business statements
10:00 NAHB survey
14:00 Fed Chairman Jerome Powell at a conference sponsored by Wall Street Journal
14:30 Cleveland Fed President Loretta Mester
18:45 Chicago Fed President Charles Evans
Earnings: Target, Cisco Systems, Lowe’s, TJX, Burberry, Tencent Holdings, Analog Devices, Shoe Carnival, Bath and Body Works, Synopsys
8.30. Home start
8.30 Building permits
16:00 Philadelphia Fed’s Harker
Earnings: BJ’s Wholesale, Applied Materials, Deckers Outdoor, Ross Stores, Palo Alto Networks, VF Corp, Eagle Materials, Kohl’s, Grab Holdings, Vipshop
08:30 Preliminary requirements
8:30 Philadelphia Fed production
10:00 Existing home sale
10:00 Leading Index
16:00 Philadelphia Fed’s Harker
Earnings: Deere, Foot Locker, Booz Allen Hamilton