The Week Ahead: Volatility Ahead of Central Banks, Crossroads of Trends

  • Investors will continue to shift from growth to dividend defensive players.
  • The short-term uptrend continued after the price confirmed the long-term downtrend.
  • Energy will plummet as recession trumps war.
  • How to determine if my S&P 500 prediction is correct

This week could prove to be a technical catalyst between short-term and long-term trends as global central banks are expected to raise interest rates amid still-high inflation.

September being the second worst month of the year, investors should resume a rotation of growth towards defensive, energy and dividend stocks.

Energy was the only sector in the index in the green, up 1.83% on Friday.

Utilities were the big relative gainer for the week, falling just 1.47%. Health follows with a drop of 1.81%. At the other end of the spectrum, technology has plunged more than 5%.

On a monthly scale, only energy and utilities are up, respectively by 4.36% and 0.97%. Technology lost 7% during this period.

Utilities have outperformed over the past three months, losing just 0.15%. Communication services lost 11.65%. However, Materials underperformed with a 15.05% drop due to slowing economic growth.

Additionally, on a semi-annual basis, only Energy and Utilities were green at around 9.5%. Underperforming, once again, communication services – down 21.02% – and technology, which fell 13.88%.

Again, the same sectors were the only two S&P 500 sectors to be positive for the year, with energy catapulting 44.07% and utilities gaining 4.22%.

Finally, over 12 months, energy jumped 63.52%. Utilities climbed 6.46%, putting the same two industries alone in green territory. Conversely, communication services were gutted with a loss of 30.7%, followed by technology with a drop of 23.6%. At the same time, communication services lost 37% and technology 16.3%, coming in as the two worst performers.

Energy only outperformed due to the Russian-Ukrainian war. However, the sector closed Friday less than 0.5% from its lowest level since January 27, on prospects of a slowdown. I gave a repeated bearish call. WTI was trading above $95. According to my analysis, Oil is on track to continue falling below $60.

So the outperformance of energy so far does not represent economic health, in my view. Instead, its continued decline does. Conversely, the rotation into defensive stocks and dividend-paying growth stocks is a vote of no confidence in economic growth.

We get confirmation from the global bond market, which fell into a bear market last week for the first time in a generation. Bonds suffered their “worst year in history” due to an extreme transition from the lost decade of little or no inflation to four decades.

I have been bearish throughout this rally since the mid-June low. I wrote a few weekly articles in which I said that I don’t know if stocks will necessarily go down this week, but that I expected it. When they finally peaked on August 16, having lost almost 10% since then, some readers said that of course, at some point, the markets would fall. They said I was an irrationally pessimistic “permabear”. As for them, if stocks didn’t go down the day or week I said I expected it, I was wrong.

But assets do not move in a straight line. When I make a call, I am not saying that the asset will go in my direction from then on. I specify that the asset moves first in the other direction. So how do I know if my call is successful or not? There must be a gauge. There are peaks and troughs.

Source: Investing.com

Here you can see the short term uptrend versus the long term downtrend. My call is intact if the short term does not reverse the long term with higher peaks and troughs. However, for me to be correct, the price needs to register a new low below the June low. Until then, I won’t pretend that my bearish call was just because it fell. Note how the S&P 500 found support precisely on the short-term bullish channel. That means it’s still in play. Although a lower price technically gives me (not technical analysis) reason, I will consider my call a failure. I will be proud of my estimate if price creates a lower leg commensurate with previous lows.

The price fell about 700 points, or 14.6%, between the all-time high on January 4 and the low on February 23. Then it fell another 1,000 points or 21.6% from the March 28 high to the June 17 low. That’s the kind of decline I’m looking for. The price has so far fallen 419 points, or 9.7%, from its August 16 high. If it registers at least one new low, it will drop at least 688 points, or almost 16%. On August 25, I predicted that the S&P 500 would fall towards 3000. If it reaches this zone, I will consider my call successful.

Meanwhile, major averages have fallen for three straight weeks for the first time since bottoming. The , representing growth stocks, has fallen for six consecutive days.

America came together in August, threatening further inflation and prompting more aggressive tightening, which is the theme that caused stocks to fall and bond yields to rise. Conversely, it went from 3.5% to 3.7%. This is the highest rate since 2020, tied with the lowest since 1969. However, unemployment has not risen because more people have lost their jobs, but because they have started looking for work again. . Employers are short of manpower, and this extra supply benefits the economy. However, if the new jobs do not help the economy grow, it will be another sign of an economic downturn.

The former fell on Friday because the Fed would have options and would not be forced to continue raising rates as quickly. began to fall, a sign of lower inflation. However, the dollar rebounded and closed at the highest level in 20 years, since June 19, 2002. The dollar hit and then some, and I expect it to go even higher.

Dollar Index Daily Chart

Source: Investing.com

The Dollar finished a lower flag, with the implied target of 4.62 from the breaks of 108.70 to around 112.03.

jumped on the August jobs report on Friday, despite the dollar’s persistence.

Gold futures daily chart

Source: Investing.com

Gold opened lower but erased Thursday’s losses, forming a bullish piercing pattern that is almost an engulfing pattern.

The favorable two-day reversal pattern has developed above the July lows, giving it more strength. The $1,700 price zone has been a long-standing support since April 2020. Nonetheless, the commodity is still in a downtrend from the March 8 peak.

fell for the third straight day, fourth straight week and second month. Excited traders pushed BTC above $20,000 on Friday after the jobs data, but they couldn’t sustain their gains.

Bitcoin daily chart

Source: Investing.com

The digital currency leader is trading inside a pennant in the second consecutive continuation pattern. When the pennant closes, with a break down, it will imply a target of $17,392 within .

may have completed a rising flag, implying a target of $81.50. Note that Friday’s trading developed an inverted hammer. A close above Friday’s open will suggest a move back to retest the integrity of the flag before falling.

WTI Crude Oil Futures Daily Chart
WTI Crude Oil Futures Daily Chart

Source: Investing.com

Disclaimer: The author does not currently hold any of the titles mentioned in this article.

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