Weekly Stock Market Update & SPY Technical Analysis

Weekly Stock Market Update & SPY Technical Analysis

Markets are kicking off a new month this Monday and traders are excited to see how well it measures to May’s performance. Buyers proved their resilience last month as they endured a plethora of headwinds from political tensions across the globe to economic hardships right here in the U.S. The month was the best month of the year so far, and based on Friday’s close, buyers might be hungry for more. 

Before getting into the events of this week, let’s discuss some key reports that were released last week. First and foremost, the U.S. GDP report was released and reflected a softer reading than anticipated at 1.3%. This is a significant decline from Q1 of last year around 2%. Part of the soft reading was of course a decline in American spending, but also U.S. exports fell significantly while imports rose. This signals weakness in economic activity could lead the country into a recession if the decline persists. A recession is defined as two back to back negative GDP quarters and while we’re not there yet, it’s possible we see that considering the impact inflation and high interest rates have had on consumers. 

It takes about 18-24 months for interest rates to full take their toll on the economy, and it seems like the impact is starting to be felt right on time. The Fed began their eight interest rate hike cycle about 24 months ago, which has been effective in the battle against inflation. The tight monetary policy has successfully brought inflation down from its 9.1% highs to 2.7% per last week’s PCE report, but the risk that comes with using interest rates as a weapon against inflation is a higher unemployment rate and a slowing economy. The GDP number we described above is a reflection of the slowing economy, and this week’s employment data will give more insight about the labor market. 

The U.S. unemployment rate has surprised many economists because it has stayed fairly low during the high interest rate environment, but just like we mentioned above, it takes time for the impact to be felt. Unemployment has slowly moved higher from about 3.4% to the last reading at 3.9% over the last few months, which is obviously trending in the wrong direction. This was the sacrifice that The Fed was willing to make it order to bring inflation down and unfortunately it has taken the jobs of many Americans. 

The irony behind all this is that in the very short term, the market sees the slowing economy and higher unemployment data to be a good signal. The underlying fuel for markets right now is the optimism around interest rate cuts, so the faster that demand slows and brings inflation down, the faster interest rates will also be cut, even if it means Americans losing their jobs. While in the short term that may help boost stocks higher, The Fed is flirting with a fine line of holding rates high for too long and causing a full blown recession and leap in unemployment. That will ultimately reflect in the markets in the years to come, but for now, bad news may still be seen as good news. 

SPY Technical Analysis:

SPY saw millions in buying volume in the final hour of the day on Friday and managed to close back in a more favorable position for bulls. The only resistance between the index and all time highs is 531.75, so we’re watching for a breakout above that to retest ATH. Since Friday’s rally was nearly vertical, it didn’t create many supports so the first support we have to start the week is all the way down at 521.35. There will likely be some soft of a pull back/consolidation period at some point this week to alleviate the push from Friday, we will update the levels as needed.