Consumer sentiment has turned down in early May to a six-month low.  It was 67.4 vs. 77 expected.  Inflation expectations has surged to 3.5% vs. 3.2% expected.  These two data points are survey data measuring consumer psychology.  The consumers are being squeezed by high prices and not feeling so comfortable.  The employment picture is still good enough holding everything together.  As soon as unemployment picks up, everything changes.

It’s anyone’s guess to forecast when the unemployment will pick up after the consumer has soured its mood.  It always takes much longer time for the market to have some sort of resolution.

Underneath the rally from the April 19 low, the utility and consumer staple sectors are outperforming the S&P 500 and NASDAQ.  This is a clear warning sign of a weakening economy and safe haven seeking market behavior.

Also the mid cap growth stocks took a major beating after Q1 earnings report.  Most the mid cap stocks beat top and bottom line, but they were punished by light guidance.  The market is in no mood to reward any companies talking about AI.  The market wanted to see real money.  Airbnb, Shopify, Palantir and Roblox are good examples of how the market has been punishing the mid cap stocks.

The remaining winners are companies like Amazon, Meta, Google and Microsoft.  Their growth and earnings are stable, not affected by the macro conditions as much as the mid cap stocks.  The highest quality stocks are still strong and that’s why the indexes are still in pretty good shape.

On May 14 & 15 we will have a slew of inflation data.  Based on the inflation expectations of 3.5%, we can reasonably expect the PPI and CPI data to be hot, that would make hot inflation data four months in a row.  Will the hot inflation data trigger a market correction?  Nvidia will report earnings on May 22.  Will the market wait until after Nvidia earnings report to have a selloff?

The condition is ripe for a second wave of correction.  The first wave correction off the March 2024 high was about 5.5%.  Since the April 19 low, there wasn’t a follow thru day to confirm the April 19 low as the final low of this correction.

So in our opinion, either the hot inflation data or Nvidia will trigger the second wave correction.

Below is the S&P 500 daily chart.  We could have a double top against the March 2024 high.  Even so, we are not convinced the April 19 low is the final low.