Stock Rally Doesn’t Cancel Consumer, Market Fears

2022-05-23

In this article:

  • S&P 500 rocked for another week
  • Day trading risks, possibilities
  • What we’re watching in the chaos

This market is all over the place.

One day the market is headed for a disastrous crash, the next it bounces higher giving traders relief and hope.

The next day a sector that should be strong is down while a weaker sector is moving higher.

Defensive stocks that should be an outlet for traders, such as retail, consumer staples, or healthcare, keep taking hits and some were wrecked after earnings reports last week.

Was the Monday stock market relief rally just a head fake meant to take out more retail traders?

Simpler’s traders are watching the uptick to start the week, but aren’t giving in to any fake moves as they keep their eyes on the ball. The team is looking to spin that broken record – follow the charts, trust the tools, and manage risk –  to identify a path forward.

This stock market rally doesn’t cancel consumer and market fears.

(Check out the free video, above, for insight into trading this changing market.)

Stocks rally after S&P 500 rocked again

Noticeable about this market is the vast amount of data that doesn’t deliver a clear picture of market movement or sentiment.

Despite some prominent news headlines, and the stock market rally to start the week, this market remains on the brink of a bear market with a recession prominently possible.

Simpler’s traders are expecting that within the extended outlook little will change – the market is going lower.

A key piece of data to consider is how the long-term mean is well below price in this market. The expectation is a reversion to the mean will continue and could deliver brutal results, i.e. all market gains from previous highs during the pandemic run-up to the most recent all-time high could be erased.

Watch for Federal Reserve actions as the possible lynchpin to spur such a reversal.

Market signals that lend validity to this argument can be gleaned from the S&P 500.

Among S&P 500 stocks, only 14% are tracking above the 50-day simple moving average (SMA). There is limited information about potential impact from this internal data point, so we’re watching how stocks may continue to move as a bloc with money flow in and out, but no definitive rotation showing.

Last week the S&P 500 fell 3.3% for the five-day session and the decline put the index further below its 10-day moving average. The index dipped into bear market territory on Friday (down 20% from its early January peak in price) before a late rally into the close pulled the S&P 500 above a technical signal of a bear market.

As of Friday, the S&P 500 had also posted a seventh consecutive weekly loss last week in its longest losing streak since 2001.

The first session this week closed on a higher note with the Dow rallying to 31,880.24 points to gain 1.98% (adding 618.34 points on the day). The Nasdaq jumped to 11,533.03 points for a 1.57% lift while the S&P 500 spiked 1.,81% to 3,972.13 points.

Despite the rally Monday, chart signals are showing the index holding in negative territory over the near-term. The next area of downside support is the 3,853 level which is the low from March 25, 2021.

After the Monday bounce, a move into this area could hit unwary traders.

Until there is a sustained move higher, Simpler traders will be monitoring price action around support levels to see if the markets can hold above these levels.

Another point of view is that the S&P 500 (SPX) has traded below the weekly 21 (exponential moving average) EMA for the first time since the Covid-19 pandemic started. This represents a large shift in trend and structure from the bull market.

A bearish squeeze firing on Friday gives reason to consider that the path of least resistance in this market is leaning to the downside. When a squeeze fires short, the expectation is that the squeeze will hold from five to eight ticks (or bars) on the chart – daily, weekly, monthly. Simpler’s traders are following the charts closely for commitment of these squeezes.

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What we’re watching this week

Every trader has data that they watch to help identify how this market is moving, and all traders should regularly review if there are any additional data points to consider.

The market is continuously shifting and traders must adapt.

Here are some of the points our traders are watching:

  • AAPL – As stated before in Simpler Insights, how far this fruit falls from the market tree is a pivotal indicator of direction ahead. AAPL is trading weaker than Nasdaq (QQQ) and is a high-priority ticker to watch this week.
  • Energy – Natural gas, oil, etc., still have some bull in them, showing stronger trend and structure. Expectations are for inflation and growing demand to boost price.
  • Healthcare – This sector is bolstered by large cap pharmaceuticals and select biotechnology stocks that enjoyed positive news.
  • Chemical – Stocks in this group are seeing lower multiples and higher yields. These signals have made these stocks more attractive in past bear markets affected by high inflation.
  • ETF “blocs” – Exchange-traded fund (ETF) movement indicates how the market can shift in “blocs.” While these pools of stocks trade somewhat like a mutual fund, they are not bulletproof.

With many areas of the market lower and “dependable” assets showing weakness, day trading is considered a defense against market mayhem among Simpler’s traders.

Price ranges intraday have varied steeply while the open and close have at times pushed toward flat. This creates so much high-low action that swing trading – holding overnight or longer – can be difficult for traders. Day trading offers options to get in and get out of trades between the swings high and low.

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All the chaos of this market has created a new level of stress for traders.

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Simpler Day Trading allows members to follow experienced traders as they “get in, get out” with trades that limit capital exposure. What is appealing to traders in this market is the community of professional traders delivering live-trading insights during market sessions.

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Consumer, market fear levels remain high

This volatile, complicated market is calling for traders to keep it simple. Simpler’s team is watching to “buy the dips” in the best looking uptrends and “short the bounces” in the best looking downtrends.

And keep in mind that expectations are for this market to move lower.

This week traders are keeping an eye on multiple speaking events with Federal Reserve board members and other economic officials, as well as the release of various economic and market reports. Simpler’s traders constantly cross-reference these types of activity with market internals and chart signals.

The sharp selloff of consumer-facing stocks last week highlights a strong fear among market participants – elevated inflation levels may linger for some time. This corresponds to reduced spending as prices surge, and creates a difficult economic environment as 70% of the U.S. gross domestic product (GDP) consists of consumer spending.

Until there are sustained signs that inflation has peaked and begins to decline, fear levels in the market will likely remain elevated.