/ May 05 / Weekly Preview
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Monday:
ISM Services PMI
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Tuesday:N/A
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Wednesday:
Fed Interest Rate Decision
Fed Press Conference
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Thursday:
Initial Jobless Claims (232K exp.)
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Friday:
Various Fed Speakers -
Monday:
Diamondback Energy
Ford Motor
Lattice Semi
Palantir Technologies
Upwork
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Tuesday:---
Wednesday:
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Thursday:
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Friday:
The Economy Starts To Cool
Last week, we’ve discussed the improved technical backdrop that risk assets have been enjoying. Dark Pools buying has picked up, Gamma Exposure has flipped positive for key instruments like SPY and QQQ, all while historical signals like the Zweig Breadth Thrust suggest more upside is expected.
At current levels, many key Sectors have entirely recouped and surpassed “Liberation Day” levels. The sole notable outlier is Energy (XLE), still nursing losses to the tune of -12.8% on the month. Tech (XLK), Industrials (XLI) and Communications (XLC) are all in positive territory meanwhile.
While the improvement is certainly notable, we are currently viewing the price action largely as a short-covering rally. It didn’t take much for the market to mount a sizeable rally given the extremely negative sentiment and positioning in early April. Furthermore, once a rally completes a 50% retracement of the previous decline, forward returns are positive — another historical signal favoring the bulls at this juncture.
In only one instance (August 2022) did the market set new lows following this “bear-market recovery” signal.
Notably, the rally from the recent lows, which has seen the market rise for 9 consecutive days, is one of the longest win streaks in 20 years. The current rally has not only pushed the S&P 500 over its 50-DMA, but also reversed all of the extreme bearishness which was prevalent among many stocks. Market breadth (at least in terms of stocks trading above their 20-DMAs) is now back into overbought territory, with the current score of 882 historically pointing to a normalization (read: drop) somewhere in the near future.
This is by no means a call for the market to “crash”, but advances may be hard to come by without a pullback first. The 200-DMA and the S1 level will provide notable resistance to the continuation of this rally, as many “trapped longs” will look to exit the market at current prices.
Our pullback target stands at around $534 - $542 on SPY, levels at which dip buying should occur. As it stands, now is a good time for investors to reduce risk exposure, in case the previous decline put them in a precarious disposition.
There are two reasons to be more constructive about the market over the coming month. First, May tends to be a better-performing month following Presidential elections, while June tends to be weak (hence the Wall Street axiom “Sell In May.”)
Secondly, after a sharp reversal in April, which fueled the market selloff, share repurchases return next week as the bulk of the S&P 500 has announced earnings.
Finally, another layer of optimism comes courtesy of the ongoing earnings season, where results have been “better than expected” overall.
There are two concerning caveats, however. This past week, two lower-cost food and beverage retailers posted earnings, which conveyed the underlying message that consumers are struggling. McDonalds and Starbucks reported significant domestic sales declines for the first quarter. McDonalds saw its US same-store sales fall by 3.6%, driven by a decrease in its “guest count.” This was the worst decline in same-store sales since 2020. Starbucks saw its revenues decline by 4% in its US stores. Both company CEOs noted the same themes, especially as it pertains to low-income customers:
“Consumers today are grappling with uncertainty“- Chris Kempczinski – CEO McDonalds
“Starbucks faces challenges in reviving its business… with inflation and economic uncertainty driving up costs and dampening U.S. demand.“- Brian Niccol – CEO Starbucks
In conclusion, poor consumer sentiment is weighing on personal consumption. This is reflected in the latest poll conducted by the University of Michigan, and it’s especially concerning given that consumer spending makes up the bulk of US GDP Growth.
The job market may have something to do with consumer’s poor outlook. Continuing jobless claims rose to 1.92M last week — a historically low number — but at the highest level since 2021.
Continuing jobless claims, unlike initial claims, which track new unemployment filings and are considered a leading indicator, reflect the number of people still unemployed and receiving benefits. Thus, they serve as a coincident measure of economic conditions. In the current environment, layoffs are low, but new hires are weak. Simply, the underlying labor market is not as robust as the headline data suggests. An increase in layoffs will be problematic as potential job openings decline.
Our Trading Strategy
While economic growth remains a concern in 2025, as evidenced by the poor price of oil and commodities, technical conditions have improved over the past 2 weeks. The current rally is likely limited given the short-term overbought conditions, however. It’s much more likely we’ll get a pullback in the near term, rather than more gains.
The good news is that previous resistance levels (20, 50-DMAs) have now turned into support. If the price action manages to hold at these levels, the bullish trend becomes re-confirmed. If they don’t, a retest of recent lows becomes probable again.
For now, we maintain a slightly risk-averse allocation, with increased cash resources to mitigate volatility. The plan is to increase equity exposure once it becomes clear that support is confirmed. For now, capital appreciation is still the #1 priority, but perspectives are more rosy going forward. We simply need to keep in mind that forward returns may be underwhelming when compared to the previous 2 stellar years.
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