S&P 500 Weekly Catalysts And Direction: Up 6.5% In 6 Weeks

| About: SPDR S&P (SPY)
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We talk about Brexit spillover.

Lots of economic data are on tap.

Lighter trading with July 4th weekend upcoming could mean even more volatility.

We expect a down week for the SPY.

First, last week we expected a down week for the S&P 500 (NYSEARCA:SPY) led by Brexit (See our weekly here). We followed that up with multiple reports last week that Brexit was a market risk regardless of the outcome (see "Risk" "Poor risk/reward" "Brexit", "Brexit Sell The News.").

This week we expect the main driver of stock performance to be the carry over effects from Friday's UK decision. We think the market can continue to trade down as investors tally the negative global impact. Add to that are important economic events, of which, of late, have become more dreary and inflation ridden.

Lastly, since next Monday is July 4th, this could be a lower liquidity volatile week, which adds to the story.

We expect another down week.

Here is our performance on weekly calls since we began this report six weeks ago.

Weekly Open Close Week Total
Mon, Jun 27, 16 SPY Down
Mon, Jun 20, 16 SPY Down 208.82 203.24 2.7% 6.5%
Mon, Jun 13, 16 SPY Down 209.36 206.52 1.4% 3.8%
Mon, Jun 6, 16 SPY Down 210.7 210.07 0.3% 2.5%
Tue, May 31, 16 SPY Down 210.56 210.28 0.1% 2.2%
Mon, May 23, 16 SPY Up 205.51 210.24 2.3% 2.0%
Mon, May 16, 16 SPY Down 204.96 205.49 -0.3% -0.3%

We base our direction by matching underlying medium and longer term fundamentals with shorter term catalysts and technical inputs (many of our reports and inputs can be seen on our SA page).

While we have had a good record since initiating this report, obviously we can be wrong at any time (Please click the weekly links above to see the related reports). Our performance is measured from Monday to Friday (as we said last week) because changes can only really be reacted to Monday morning.

Here are the key catalysts we see this week.

All Week: Brexit Follow Through Reaction

June 28th: 8:30 GDP. Had been slowing

June 28th: 10 am: Consumer Confidence

June 28th: After Market Close. Jerome Powell, "Recent Economic Developments, Monetary Policy Considerations, and Longer Term Prospects" The Chicago Council on Global Affairs: Food, Fuel and Finance Series.

June 29th: Economic Reports

PCE: Core Fed inflation measure

June 29th: 9:30 am EDT. Janet Yellen, speaks with ECB, timely.

July 1st: 10 am EDT. Fed speaks on FX

July 1st: Auto Sales

July 1st: Prepare for 3 day weekend.

July 4th: Independence Day, Market Closed

June 6th (Next week): FOMC Minutes: focus on weak jobs

There are many other catalysts but these are the ones that we feel have the most importance.

Let's Take Catalysts One By One

Brexit Reaction

We expect the stock market Brexit reaction to carry over this week. We think as investors do their research over the weekend, they'll further understand that this could be the beginning of further EU issues which can further impact the economy and markets.

We cited the VIX was a big mismatch when compared to the upcoming risks. Here is the VIX chart we showed where we called it a "mismatch" to fundamentals back on June 4th (chart below).

Below we'll show the latest VIX which shows less of a mismatch.

We think the Brexit move is a major event and can lead to more investor concern. The VIX is still not up near its highs, so we think there is room for more market downside (see chart below).

Here you see (chart above) that even though we had a big jump in the VIX we are still roughly in the middle of the historic range. We think this means that the market is not oversold based on the news, yet.

June 28th GDP

Here is the recent GDP.

You can see that GDP has been gradually slowing after peaking in 2014. This is a concern especially as we've been seeing inflation pick up.

We don't really care much about street estimates. We really care about the trend. That said, the street is expecting a slight pickup to 1-1.1% versus last report of .8%.

We recently saw an SA report that the Atlanta Fed is expecting 2.6%. The Fed has been way off in their expectations. We even heard the Fed chair tell us not to listen to their forecasts ("Pulled Guidance").

Obviously when looking at the trajectory, any further declines will mean recession. We think that will be a clear stock market negative, especially with the Fed out of bullets near zero interest rates.

June 28th Consumer Confidence

This is a fun chart to analyze. So far consumer confidence has been very strong. We reported last week ("Consumer Headfake") though that this may change. Confidence usually works inverse to consumer inflation expectations. When consumers feel they will not have to spend more their confidence builds.

Here's inflation expectations.

As we said, now that prices are moving up, we expect these strong readings to reverse.

Here's gas at the pump rising.

We said in that report (see here) that year-over year matters less to consumers. What matters is prices "of late" which are up.

We think that can start to turn the confidence numbers at some point.

June 28th, After market close Jerome Powell

We expect the June 29th meeting with Janet Yellen to overshadow this meeting but we expect this also to be important. The topic is called, "Recent economic developments."

June 29th Economic Reports

There are multiple economic events June 29th, all important. That said we are mainly focused on Core PCE, the Fed's main inflation measure.

We were amazed that recent Fed commentary did not include the pickup in inflation. The Fed only openly worried about the last 3 months of weak jobs but conveniently overlooked inflation in that same time period.

There are multiple inflation measures that showed a pickup in the last few months (CPI, oil, import prices and most important PCE).

Here's the Fed's main measure of inflation.

PCE Dec Jan Feb Mar Apr
Current Dollars 0.1 0.1 0.2 0.0 1.0
Chained Dollars 0.2 0.0 0.3 0.0 0.6

We call that a jump.

Growth economic measures have a double whammy status. Strong is bad (it means rate-hikes) and weak is bad (it means we're stuck with interest rates already near zero). That's why we focus more on inflation, which we see getting worse (as we've reported).

June 29th, Janet Yellen speaks with ECB

This meeting is incredibly timely given the UK news. We hope to have a deeper analysis ahead of it. Our main take is that unwinding risk continues as many institutions and countries have to reposition their currency books with the change in EU status.

We saw this unwinding already leading to big downside the first day. We think there is continued risk ahead. It will be incredibly important to see what this meeting says about it.

July 1st, Fed speaks about currencies

This meeting holds less importance to us than the one on June 29th but may also be important to understand the risk that remains.

July 1st, Auto Sales

This is another potential problem. Jamie Dimon of JP Morgan (NYSE:JPM) talked about a risk in auto credit. As auto sales look peaky and may roll, this number becomes more important.

Herein lies one of the terrors of artificially low rates. It drove strong demand from buyers that may not have bought otherwise, further increasing consumer debt levels.

Here's the auto loans chart.

You can see the amount of loans came down meaningfully which may slow sales. The sales and the loans each effect each-other which can cycle causing a slowdown.

July 1st: Prepare For 3 Day Weekend

This is a catalyst for us. It causes risk as investors may want to go on vacation with a clear mind and clear "books." We think that could mean that if the week sees down stocks, investors might want to clear their holdings to take a "fresh look" over the weekend. We think that can add to a downward bias all week.

July 4th: Independence Day, Market Closed

If the week of June 27th ends up being down, we'd expect an extra day of vacation will give investors more time to worry which can cause selling pressure the following week. We are not making a call yet on next week, we just think this should be a factor considered this week.

June 6th: FOMC Minutes

While this isn't until the following week we think it matters. We are shocked that the Fed did not mention inflation picking up in their last meeting's release. That said, they did raise their inflation expectations in an addendum report that same day.

We are looking for comments in the minutes speaking to inflation. If they speak about it, it would be something new and a risk for markets. (Here we analyze why we think the Fed left out inflation).

This meeting also reflects the worry they had on the last jobs report which cancelled a "rate hike in June."


We expect down stocks this week. The combination of a Brexit spillover and economic reports could continue this "summer swoon."

The VIX is still in the middle of its historic range. We think the enormity of the news leaves the VIX further upside which can mean further risk to stocks.

Print out this report and keep it on your desk for the week. Hopefully it helps.

If you like our work please share.

Good luck and please be in touch. All of your comments teach US a ton.

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Disclosure: I am/we are short S&P 500 WHICH CAN CHANGE AT ANY TIME.

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