Right now, one thing is clear, this market is almost solely focused on rate cuts. It’s hungry for them and it wants them to begin this week as this hope has been the fuel powering the latest leg of this rally. Last week only further stoked these hopes once the fresh data began to come out. On the heels of the previous week’s weak jobs data, last week featured several new inflation data points for investors to digest. Both the August PPI & CPI were reported, and the results were cheered by markets. PPI posted a surprising decline, while CPI was in line with expectations. Each of these reports delivered a satisfactory answer for markets because they confirmed the ongoing narrative. These reports only added to the growing body of evidence that investors are using to justify and convince themselves that a rate cut is on the way. Once this data came in, markets quickly shifted to begin pricing in almost certain odds of a rate cut coming this week. Getting further confirmation that this is the most likely outcome provided stocks the boost they needed to finally breakout decisively to the upside. Last week’s broad move higher was also fueled in part by one of the most impressive earnings calls that I’ve seen in quite some time. ORCL reported their Q2 earnings last week and while they actually missed their Q2 EPS estimates, the real story was in their forward guidance. The revenue numbers that ORCL management guided to for the next few years were so above and beyond anything that Wall St analysts were expecting, the stock ripped higher by more than 40%, yes 40%, in Wednesday’s trading. Of course, ORCL itself is no small player in the market, as one of the largest providers of data center and cloud computing capacity. In addition to their rise, the overwhelming bullish guidance was a tailwind to many other companies closely connected to the A.I. story. This earnings report helped to further convince investors that there is still plenty of runway in front of this A.I. buildout story and the investment theme is still likely in its earlier innings. Due to these two major bullish catalysts, stocks took another significant step forward, likely beginning the next leg of this rally.

            After last week’s enthusiasm-filled trading, the technicals and internals continue to look quite strong and portend an encouraging outlook for the rest of the year. Across the board, all of the major indexes are continuing to trade above all significant short, medium and long-term trend lines, further cementing the strength of this bull market. As exciting as last week’s bevy of new highs were, looking under the surface of the market, we are getting even more encouraging signs. The equal weighted S&P 500 also broke out to a new all-time high, which is a major sign of good and improving breadth in the market. Furthermore, the Advance-Decline line for the S&P 500, after consolidating for several weeks, finally powered through resistance to also make a new high. Each of these are very positive signs that we are seeing more and more stocks and pockets of the market begin to participate to the upside and contribute to this rally. Now, after last week’s definitive pop higher, the S&P 500 does find itself beginning to creep into short-term overbought territory. As we know, indexes and stocks both can sometimes remain in overbought territory longer than one may expect but this is a sign that at current levels, the indexes are inching toward being a bit overextended. This is not a major concern however, this is just a bull market acting like a bull market. The overall trend is continuing to move higher and that is the principal concern.

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Key Events to Watch For

  • Retail Sales – August
  • FOMC Meeting- Fed Decision

Before getting to the highly anticipated Fed meeting this coming week, we will be receiving one fresh data point that traders should pay attention to. On Tuesday morning, before the market opens, the retail sales report from August will be posted. This is always a key read for the market to watch because it is the kind of hard data point that signals what consumers are ‘actually’ doing rather than what they are ‘feeling’. These hard data points are typically much more reliable than sentiment surveys as they show whether consumers are still spending or not. Retail sales for August are expected to have risen 0.3%, which would follow a 0.5% jump the month prior. Seeing consistent demand here will be welcomed by the market as it will signal that consumers are still hanging in there despite signs of a weakening labor market.

            In what will clearly be the headlining event of the week, Wednesday will bring us the long anticipated September Fed meeting. In light of recent macroeconomic data reflecting that upward pressure on inflation seems to be contained but the labor market is clearly showing signs of slowing and weakness, markets are fully expecting the Fed to opt to finally reduce their policy rate at this meeting. Ever since the Jackson Hole Summit, the probability of a rate cut has been rising with the recent macro data only bolstering the market’s confidence that a cut is on the way. In fact, as of Friday’s close, the CME FedWatch tool showed that markets were pricing in a 100% probability of a rate cut coming. The only questions that remained were the size of the cut on the way and if there would be more to follow. While the chances of a larger than 25bps cut at this meeting are slim, they are not zero. This market is so hungry for rate cuts and has rallied so much in anticipation of one that we will need to see this delivered this week or risk markets being disappointed and surprised. Additionally, investors will be listening closely to see if Fed Chair Powell’s presser reveals any clues about what may be on the way the rest of the year.

Thank you for reading this week’s edition of the Weekly Market Periscope Newsletter, I hope you enjoyed it. Please lookout out for the next edition of the newsletter as we will give you a preview of the upcoming week’s important market events.

Thanks,

Blane Markham

Author, Weekly Market Periscope

Hughes Optioneering Team