Is Wall Street's Negative Outlook Warranted?

As they anticipated Thursday's CPI data for the most recent figure on inflation, the stock and bond markets were uneasy last week. The technical prognosis was favorable before to the CPI announcement, as it had been before the monthly employment report on January 6.

Following the positive CPI number on Thursday, the earnings season officially began on Friday. Even though Bank of America (BAC) and JPMorgan Chase (JPM) beat earnings projections, Wells Fargo & Co. (WFC) and Citigroup (C) missed, but all were up on Friday.

The Nasdaq 100 Index and beaten-down small-cap iShares Russell 2000 (IWM) were the two best performers last week, climbing 5.3% and 4.5%, respectively. The Dow Jones Transportation Average increased by 3.5%, while the S&P 500 increased by 2.7% to reach a one-month high. The other major averages followed closely.

The SPDR Gold Shares (GLD) increased by 2.9%, outpacing the Dow Jones Industrial Average's 2.0% gain. The more conservative Dow Jones Utility Average had a weekly gain of 0.8%.

The relative performance chart from the beginning of the year shows that IWM and $TRAN are both up over 7%, which is a significant increase above the $INDU's gain of 3.5%. Of fact, if you take a closer look, the $INDU has beaten the $SPX by 5% ever since the relative performance analysis recognized it as the market leader in October.

The weekly statistics met expectations, and the market internals had strengthened prior to the release of the CPI (see Tweet). Only 499 issues declined on the NYSE, while 2822 issues advanced. For the week, there were 256 new highs and just 28 new lows. The NYSE's market internals were better than the Nasdaq Composite's, which was consistent with a rise that had a wider base.

The weekly decline from the 2022 highs (line a) as well as the October high were both easily exceeded by the NYSE Composite's closing price. The weekly SAR+ band at 16,516 marginally overcame the 61.8% Fibonacci barrier at 15,851 last week. At 15,152, the 20-week EMA is increasing and optimistic.

A week ago, the NYSE All Advance/Decline line crossed above its WMA and has since begun to rise more quickly. It is now prepared to test the downward trend, or line b, and a firm close above it will show that the trend is now moving in the right direction. The October high has been eclipsed by the A/D line, which now displays line c, a new bullish trend.

In the next weeks, profits will be the main topic of discussion because of complaints that earnings projections have not been sufficiently revised downward to reflect the current state of the economy. "The analysts who anticipate the fortunes of corporate America have rarely been more negative at the start of a year than they are in 2023," the NY Times piece observed.

Refinitiv data anticipates a quarterly fall in S&P 500 profits of 2.2%, while Factset anticipates a quarterly decline of 3.9%. I don't buy or sell stocks as a market technician based on earnings reports or forecasts. It follows that it is not strange for me to interpret the dismal earnings prognosis as a favorable mood reading for the stock market. This was also true in the spring of 2016, following the completion of a technical bottom in the stock market.

According to a weekend headline in Bloomberg, "JPMorgan, Goldman Say Stocks Recovery Won't Be Easy in 2023," there is a lot of pessimism from institutions. According to the 22 strategists surveyed by Bloomberg, the S&P 500 will close the next year at 4,078.

Only 79 points separate that from where we ended Friday. The modest expected year rise historically makes me think of 2017, when the S&P 500 ended at 2673 while the average year-end forecast was 2368. According to a well-known expert, the S&P 500 might fall by as much as 21% in the first quarter of 2018.

The weekly downtrend, line a, was just barely breached by the Spyder Trust (SPY). The next obstacle on the upswing is the October high and 50% resistance level at $413.36. Once it is surmounted, the SPY should go after the $428.85 (61.8%) resistance. The 20-week EMA is around $390.60.

The S&P 500 Advance/Decline line has crossed over line b, the previous high, and its downtrend, indicating a new weekly uptrend. A day or two of consolidation would not be unexpected because several of the A-D oscillators have overbought levels on a short-term basis.

The behavior last week supported the notion that the yield on the 10-year T-two-week note's bounce was just a downtrend's recovery. The closing was just above the line of support at 3.40 percent (line a). The 3.037% region has both an uptrend and more significant support.

At the end of November, the weekly MACDs started to trend downward. Another indication that rates would move down rather than upward is the drop below the September lows. The daily MACDs (not displayed) are downtrending negatively and have not yet shown indications of bottoming. Since bonds are becoming somewhat less appealing as a result of the declining rates, equities will benefit.

In the next week, there will be many significant economic releases in addition to the first complete week of earnings reports. They consist of industrial production, retail sales, the producer price index, and the Philadelphia Fed manufacturing index.

With double-digit gains, several of the more volatile ETFs are overbought and may easily have a 1-2% retracement. The dollar and US stock index futures declined during Monday's trade. Many equities have favorable technical analyses, but the prices are still within trading ranges where risk may be managed.