Stock market is waiting for a trigger, expect volatility soon

Stock bulls are coming off another record-setting week with the S&P 500, Dow, and Nasdaq setting new all-time highs on Friday. The focus this week will largely turn to the second-quarter earnings season which “unofficially” kicks off with big Wall Street banks JPMorgan Chase and Goldman Sachs reporting tomorrow, followed by Bank of America, Citigroup, and Wells Fargo on Wednesday, and Morgan Stanley on Thursday.

Fundamental analysis

Second-quarter results are expected to be weaker for the group following a reduction in loan loss provisions that helped propel a big surge in first-quarter earnings. Overall, analysts expect S&P 500 companies to report earnings growth at a whopping +64%, which would be the strongest in over a decade. Global central banks are in the spotlight this week also, as inflation continues to soar around the world.

U.S. Fed Chair Jerome Powell appears before House and Senate committees on Wednesday and Thursday as part of the central bank’s semiannual monetary policy report to Congress. A preview of the report issued Friday said that shortages of materials and “difficulties in hiring” are holding back the economic recovery. Powell in his testimony is expected to stick to the Fed’s script of defending current monetary support while reiterating the bank’s stance that inflation is mostly “transitory” in nature.

Central banks

This week also brings updated monetary policy from central banks in Canada, New Zealand, and South Korea. Bank of Canada, which first scaled back its asset purchases in April, is expected to announce another reduction when it meets on Wednesday. New Zealand, also on Wednesday, and South Korea on Thursday are seen maintaining current policy but are expected to signal an earlier start to tightening than initially anticipated.

All three countries are currently experiencing soaring home prices that have put their central bankers under pressure to help curb the steep climb that many believe has been stoked by ultra-low interest rates and central bank asset purchase policies.

Central banks in the EU and England are in a similar position. Soaring real estate prices are contributing significantly to global inflation pressures but officials across the board remain hesitant to relax policy over concerns that such a move could derail the ongoing economic recovery.

Stock market bulls believe the worst of the “inflation” fears and headlines will soon be in the rear-view mirror as there shouldn’t really be many new surprises. Lumber prices have peaked and come back down to earth, more than likely we have already digested the biggest percentage gain in crude oil prices, car prices are probably close to peaking, and some of the transportation dislocations are starting to slowly improve.

Coronavirus cases

Many countries are also now dealing with a resurgence in coronavirus cases which has led to renewed social distancing measures and even lockdowns in some places. Japan last week made the decision to bar fans from the upcoming Olympics after it declared a new state of emergency due to a rise in Covid cases. The highly transmissible “Delta” variant is now in at least 100 countries and the surge in outbreaks has prompted some analysts to downgrade global growth projections for this year.

Investors will get a look at the latest inflation trends with the Consumer Price Index on Tuesday and the Producer Price Index on Wednesday.

S&P 500 technical analysis

SP500 trades close to key Fibo and Gann resistance 4400. I will not be surprised to see a profit booking at that level. However, we still have some accumulation at these highs. On the other hand, ADL shows weakness. So, likely earnings are a trigger the market is waiting for.

SP500 VIX is at its low. And in most cases, it is a signal of coming volatility. It feels like all indicators are missing something. I believe it will take a bit more time to generate a stronger signal. In general, massive profit booking (if any) near 4400 can cause a pullback to 3800. Especially, if earnings turn out to be weaker than expected or we see a rise in COVID cases.