Stocks Rose Again Last Week, But The Current Market Cycle Appears To Be Topping Out

Summary:

• The S&P 500 rose by 1.1% last week, up 32 points to 2940.
• Stronger than expected economic growth propelled stocks higher, which makes the Federal Reserve’s path forward unclear.
• Our projection this week is for a small decline in the stock market, followed by a pop to the upside.

The stock market posted modest gains last week, as investors' focus moved from geopolitics to earnings and ultimately pushed stock indexes to new all time highs.

The majority of companies continue to beat earnings and sales expectations, however it is notable that they are beating estimates that have been consistently lowered. Just this quarter, 32 companies in the S&P 500 have guided earnings lower, compared to only six which raised guidance, according to FactSet.

On Wednesday, chipmaker Xilinx, Inc. XLNX beat expectations for both earnings and revenue, but perhaps not by as much as Wall Street had hoped for — the stock fell by 17%. In fact, this appears to have had broader implications as the semiconductor sector, which down by 3% from that point.

The big economic news was on Friday when the economy's first quarter growth rate exceeded expectations, posting 3.2% annualized growth compared to and estimated 2.0%. This was due in part to higher-than-expected government spending at the state and local levels. In any case, the news pushed stocks higher by 0.5%, even as the 10 year notes were also higher.

The stronger growth creates a quandary for the Federal Reserve, which recently paused its pattern of increasing interest rates on expectations of slower growth. The central bank will meet this week to discuss its economic outlook.

S&P 500 (SPX) Daily Chart

Turning forward, our approach to technical analysis uses market cycles to project price action. While strong upside momentum has carried stocks higher for the better part of this year, we believe this may be starting to wind down.

Our analysis of the S&P 500 is for stocks to begin to roll over, within the context of its current intermediate cycle, shown on the chart above. For this week, we see a small blip lower and then a move back to the upside, as a new minor cycle begins.

For the remainder of May and possibly into June, we believe downside risks will increase, based on longer term market cycles. Yet once this correction is over, our call is for another upside move into the latter part of this year, based on the longer term market cycles.

Related Links:

There's Only One Market Sector Where Earnings Estimates Aren't Falling

This Week, Market Eyes China Talks, Fed Meeting As Earnings Continue