The markets are functioning well despite the government shutdown but the lack of data from the Bureau of Labor and Statistics (BLS) means portfolio managers must look elsewhere for benchmarks on the health of the economy. We did get the CPI data on Friday which came in at 3% which is slightly better than expected but above the Fed’s 2% target. However, that will be the last of the BLS data until Congress passes a continuing resolution to reopen the government. Unfortunately, we do not have any indications this will happen this week.
The Fed Meeting On Wednesday
The Fed operates independent of the federal government and will be releasing their next policy statement at 2PM on Wednesday. Markets widely anticipate a 25 basis point rate cut, reducing the federal funds rate to a range of 3.75%–4.00%, the lowest since December 2022.
The decision comes as the U.S. faces a rare combination of persistent inflation and a weakening labor market. The ongoing U.S. government shutdown has delayed key economic data releases, leaving the Fed with limited information to guide its decision-making. This dual challenge complicates the Fed’s dual mandate to promote maximum employment and stable prices. Fed officials have expressed differing views on the urgency of further rate cuts, signaling a cautious approach amid economic uncertainty.
Key Earnings Reports This Week
We should see earnings reports ramp up in the coming two weeks which will provide some hard data for investors. Below are some of the most notable reports of the largest companies as their substantial market capitalizations will have implications for market sentiment.
The Stock Market Technicals
Stocks have rallied persistently since the taper tantrum correction we saw in April. Most of the gains have been coming from technology and the capital spending around artificial intelligence. Over the last several weeks, we have seen stocks grind higher with a lack of momentum while market analysts warn that valuations looked stretched. Is it possible to see this visually in the stock market chart patterns?
The Set-Up in the S&P 500
I would like to point out the ending diagonal pattern in the graphic as we are seeing one potentially playing out in the S&P 500. An ending diagonal is a pattern that usually shows up at the very end of a price move, like the last push in a stock or market before it reverses. Think of it as the market “exhausting itself.”
In the chart below of the S&P 500 Index, we can see the potential for an ending diagonal on the weekly chart below that started back in 2022. The last several weeks have indicated a ‘throw over’ developing above the upper orange trend line – typically the last move in an ending diagonal. This interpretation would be invalidated if we accelerated above 7000 – maybe earnings this week from the large-cap companies will give us an indication if this will be the case.
Zooming In On A Shorter Timeframe
One more technical chart pattern to discuss. A bearish island top is a rare but strong signal that a market or stock might reverse from an uptrend to a downtrend. Think of it as a “price island” that becomes isolated from the surrounding price action before the market drops.
Timeframes do matter as patterns in short and longer timeframes look the same but play out over much different rates of change. In the chart below, we can see the price action for October in the S&P 500 Index is showing a short-term ending diagonal with a potential throw-over developing. To add fuel to the situation, the throw-over may be a bearish island formation so if we gap lower on the Monday opening that would be a red-flag for the S&P 500. If this happens then we would likely end up at the bottom of this chart.
A short-term pattern can show how the fuse is lit for a longer term frame but it is rare to thread the needle on patterns between two vastly different time frames. If we get news the market likes from earnings and the Fed this week, then every push higher weakens the potential for these bearish patterns to dominate the tape. It should be a pivotal week for the technicals!
Thank you for being a reader!
President, Kisco Capital
