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SUMMARY
Dow Jones (DIA) has been our go-to index for monitoring the current pullback. Here’s a concise overview of the situation and what lies ahead:
- Current Status: The Dow is nearing oversold levels. If markets open red on Monday, we will officially enter oversold territory. While this is not a full-blown correction, the 7.7% pullback is a significant enough drop to reset a lot of overvalued stocks.
- Potential Bounce: Markets are setting up for a strong rebound, but next week brings critical events that could sway momentum dramatically.
- Key Events:
- PPI (Tuesday) and CPI (Wednesday): A tame CPI report is essential to avoid a deeper correction.
- Earnings Season: Big banks kick off earnings starting Wednesday morning and continue through Thursday. A solid earnings season could stabilize markets, but with current weakness, disappointing earnings could deepen the pullback into a full-blown correction.
- Key Events:
The next week will likely dictate whether we see recovery or slide further into bearish territory.
Dow Jones analysis
DIA has breached its first support level at 424 and is now heading towards 418 (the chart incorrectly labels it as 420). This long-term support line could act as a critical barrier to further downside. Additionally, the RSI is nearing oversold territory, indicating potential relief ahead.
While technical analysis often provides valuable insights, it is overshadowed when binary events dominate the narrative. Next week brings significant events:
- PPI (Tuesday)
- CPI (Wednesday)
- Big Bank Earnings (starting Wednesday pre-market through Thursday).
Predicting these outcomes is a futile exercise, but the path forward is clear:
We need CPI and PPI to reflect inflation under control and strong earnings from major banks to stabilize markets. Without these, things could turn ugly very quick.
VIX – Flirting with correction territory
The VIX, the market’s fear gauge, is hovering near correction territory, reflecting heightened uncertainty. The Dow has already experienced a 7.7% pullback over the past five consecutive weeks, which is significant. However, if the upcoming CPI and PPI reports reveal persistent inflationary pressures, the market could face a deeper slide.
Historically, full-blown corrections can last 4-8 weeks, meaning we could still see additional downside if macroeconomic data disappoints. With the current pullback already at week 5, the next week’s inflation reports and earnings season will be pivotal in determining whether the market stabilizes or continues its downward trajectory.
$DXY looking horrible
$DXY (U.S. Dollar Index) has been climbing steadily since 9/30. A rising dollar often signals trouble for equity markets, as it tightens financial conditions and pressures corporate earnings, especially for multinational companies. Combined with the TNX, these indicators provide valuable signals of weakening momentum. Keeping a close watch on $DXY will be essential as it could further weigh on equities if the trend continues.
TNX looking nasty as well. Is there any hope at all?
A rising TNX (10-year Treasury yield) is another negative signal for equity markets, often seen as a bad omen. However, is it all doom and gloom going forward? The 3-year weekly chart of SPY and TNX illustrates their inverse correlation, offering some interesting insights.
As TNX approaches a multi-year high, it’s worth noting what happened the last time it peaked on 10/30/2023. Following that peak, the stock market staged a massive rally that lasted a full six months. While this is not a prediction, historical patterns can be intriguing. The stock market often follows recognizable trends, and drawing comparisons from past data provides valuable context for potential outcomes.
Earnings – The Big Banks kick off earnings season next week
Get ready for earnings season—the first wave of significant earnings reports is here. Starting next week, all major financial institutions will begin releasing their earnings. With markets already under pressure, we absolutely need strong earnings beats and raised forward guidance to stave off a full-blown correction.
Macro Events – CPI/PPI baby
Markets began their current slide after Powell dismissed expectations for rate cuts in the last FOMC meeting, citing the Fed’s concern over inflation reemerging. His message was clear: cutting rates too quickly is not an option. This makes next week’s CPI and PPI reports especially crucial. If inflation appears to be under control, it could not only ease many concerns but also rekindle hopes for further rate cuts in 2025.
