May 22nd 2023

Market Crossroads: Bulls and Bears Clash Amid Overbought Conditions and Uncertain Future Catalysts

The bulls and bears have been battling it out for months. Fundamentally, the market is overbought with weakening future earnings estimates combined with high stock prices.

Manufacturing is weak, retail sales are weakening, and the nation has back-to-back quarters of record-high credit card debt, nearing 1 trillion dollars. Yes, that’s a trillion with a T. Then again, how can we be blamed when our “leaders” can’t figure out how to handle the nation’s budget and debt?

But technically, the market is breaking out into new 9-month highs after being stuck in a tight trading range.

This week the market took off on news that the debt ceiling debate was close to being resolved… until it wasn’t.

When the discussions broke down on Friday and the smoke cleared, the S&P 500 (SPY) wasn’t able to clear $420. The ETF of the index closed at 418.62, which is higher than the February swing high of 418.31. That has cleared the way for a potential move up past $430, which would be the April 2022 swing high.

A quick note on the chart above – the momentum, as shown using the Relative Strength Indicator (10 days) is showing a reading of 62.72. A reading above 80 shows an overbought market in terms of momentum. You can see from the chart that the SPY rarely sees an above 80 reading, but the SPY tends to pull back around a reading of 60. We’re currently seeing a reading of 62.72.

Now, what does it mean if the market pulls back from here and falls back into the previous trading range?

It’s likely that we will continue to see sideways trading until a stronger catalyst will help either the bulls or bears win the debate. I don’t see the debt ceiling as a strong enough catalyst for the bulls to win overall, but it is helping them right now.

Could we see a rally past $420? Of course! Anything is possible and the bulls are in control at the moment.

I personally thought the market was going to head lower last week. My trading accounts didn’t appreciate the rally, but that’s what happens when you have a theory and anticipate the move rather than get in after a move starts.

Ok, let’s see what the potential market catalysts are for the week ahead. Will the bulls win the race to 420 or even 430? Will the bears win the week and help the market down to test the 50-day moving average?

Tuesday – 9:45 am EST – Flash Manufacturing PMI – Last month the manufacturing report beat the forecast of 49 with a 50.2 reading. Anything greater than 50 indicates the industry is in a state of expansion. The forecast for this month’s report is a reading of 50.0. That would be a slight dip from last month’s 50.2.

Tuesday – 9:45 am EST – Flash Services PMI – Similar to the Flash Manufacturing PMI, a reading above 50 shows the service industry is in a state of expansion. Last month’s reading was 53.6. This month’s forecast is 52.6. It would be a dip from last month, but still above the crucial 50 reading.

Wednesday – 2:00 pm EST – FOMC Meeting Minutes – The Fed is back! Bets on the Fed announcing a rate increase have now increased from 33% to 44%.

Thursday – 8:30 am EST – Preliminary GDP Quarter-Quarter – The forecast is a 1.1% reading, which would be a significant drop from February’s 2.7% reading.

Thursday – 8:30 am EST – Unemployment Claims – The forecast this week is 249k claims, up from last week’s 242k. The four-week record high was 264k claims.

Friday – 8:30 am EST – Core PCE Price Index – The month-over-month forecast is a 0.3% increase, which would match the reading from April 28th’s report. The year-over-year forecast is 4.6%, which again, would be the same as last month’s report.

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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation.