Earnings season beginsMany of you know that we have been skeptical about the rally in the stock market over the past year. In fact, we called it a bear market rally and touted a decline toward $3,400 once it ran out of steam. Our thesis for this thinking was that unemployment would start picking up, corporate earnings would decline, and interest rates would lead to cracks in the economy. While we began to see cracks in the banking sector at the end of 1Q23, we did not see much follow-through with the rising unemployment and falling corporate profits. After the FED pumped liquidity into the market as a response to the regional bank crisis, we noted that these developments would likely get postponed further into the future.
Now, with another earnings season looming over us, we can finally get more insight into what is going on in the underlying economy. If there is an improvement in earnings and future outlook, it will increase the odds of a shallow recession, likely proving our thesis about a heavy correction toward $3,400 wrong (especially if the market continues higher from the current level). As a result, we will pay close attention to the banking sector, which is reporting its earnings first. Among some of the important subjects of our interest will be credit issuance, delinquencies on debt, and deposits.
Regarding most recent developments, SPX broke above the resistance near $4,456 yesterday, which is bullish. If SPX breaks above $4,500, it will further bolster the bullish case in the short-term. The same applies to the rising RSI if it breaks above 70 points. In such a scenario, we would expect SPX to rise somewhere between $4,550 and $4,600.
Illustration 1.01
Illustration 1.01 displays the daily chart of SPX and simple support/resistance levels.
Technical analysis gauge
Daily time frame = Bullish (with RSI and MACD showing divergence with the price)
Weekly time frame = Bullish
*The gauge does not necessarily indicate where the market will head. Instead, it reflects the constellation of RSI, MACD, Stochastic, DM+-, ADX, and moving averages.
Please feel free to express your ideas and thoughts in the comment section.
DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.
