Last week’s trading was quite unique in that it felt markets were tensed up the entire week headed into the ‘Main Event’ on Friday morning, in Fed Chair Powell’s speech. Coming into the week, we were fresh off of a very mixed bag regarding inflation data given that CPI came in cooler than expected and PPI data came in significantly hotter than expected. This hot PPI report had investors anxious headed into Powell’s speech because it was a clear sign that the dual mandate of the Fed is in legitimate tension putting the FOMC in a tough position. Because of this, some of the more ambitious rate cut hopes had been dashed and this put some pressure on stocks as investors’ outlook on rate cuts had become more uncertain. As the week unfolded heading into Powell’s Friday speech, the market experienced significant ‘risk-off’ trading that was highly concentrated in the momentum and growth names that have been among the top performers this year. Investors were seemingly taking some profits in advance of this meeting and rotating these gains into other pockets of the market which had been underperformers YTD. This did result in some broadening out in the market, but net-net, prior to Friday’s trading, the result at the index level was that the S&P 500 declined for five consecutive sessions. Additionally, there were several significant retail-sector earnings reports throughout the middle of the week that put further selling pressure on the indexes. Each of these reports contained their own unique weaknesses and shined light on some headwinds in the retail sector, namely tariffs. Given that these major retailers are key players in the real economy, seeing weakness across several of these reports exacerbated the mid-week selling. All of this said, markets were on edge headed into Friday because many stocks had recently rallied on hopes of rates cuts and the fate of that bullish trading rested with the underlying message in Powell’s speech. Shortly after the market open on Friday, the theme of Powell’s message was released and markets ripped higher virtually in an instant. Powell made it clear that now the data reflects that the greater issue posed to the Fed is from the labor market and it now appears appropriate for the FOMC to begin cutting rates. Many investors were bracing for a very hawkish Powell, but we ended up getting quite the opposite. Markets received this quite dovish message from Powell, and it was exactly what they had hoped for, essentially confirming that rate cuts are on the way. This quickly spurred the S&P 500 & Dow Jones indexes to leap to new all-time highs, enough to entirely erase the selling from earlier in the week.

            On the heels of last week, which featured some highs and lows, it really was a week where seemingly the sentiment around the market soured before the technicals ever did. Early last week, the market leaders from this year were getting hit hard and sentiment was declining. But if you look at the charts, the S&P 500 was simply in the process of making a new higher low, a normal and expected occurrence in a healthy bull market. Additionally, if you were to look under the surface last week, on several of the down days for the S&P, there were actually some positive signs for breadth. On several of these occasions, the total daily volume traded on the NYSE was decisively positive, meaning more shares rose in price than fell. Furthermore, last week we got a consistent trend of outperformance by the equal weighted S&P index compared to the headline S&P 500. This led to over 70 percent of S&P stocks trading above their 200-day MA by week’s end. Each of these signs are confirmations of the broadening out in breadth that occurred under the surface last week even as the indexes were declining. At the close of the week, the internals and technicals for the market remained quite strong. As mentioned above, two of the major U.S. indexes finished the week at new all-time highs. All major indexes are trading above all significant short, medium, and long-term trend lines and are making consistent patterns of higher highs and higher lows. All of this portends quite a strong outlook for stocks based on the charts and technicals. However, it is wise to never become complacent and recognize that after last week’s huge leap higher, the new week ahead brings new questions and events that will move stock’s price action.

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Key Events to Watch For

  • Key Earnings in Focus (NVDA & CRWD)
  • July PCE Inflation Report

Despite seeing a bit of an unwind in the strong momentum winners early in last week’s trading, most investors are quite aware that the A.I. capex spend fueling this A.I. Revolution is truly the tentpole that is holding up this market. Much of this capex spend is flowing directly to Nvidia as they are making the cutting edges chips making the AI Compute possible. On Wednesday, in the aftermarket, NVDA will report their Q2 earnings. All expectations are that they are going to post massive YoY Q2 earnings growth with the market expectation set at 48.5%. Since NVDA is the poster child of this A.I. bull market, between their Q2 results and more importantly their guidance, the significance of this report cannot be understated. There is another major report due on Wednesday too; CrowdStrike (CRWD) will report in the after-hours as well.  The Street is expecting CRWD to post EPS of 3.52, so the bulls will be hoping to see this number exceeded.

            After last week’s block-buster speech from Fed Chair Powell, investors eyes are going to be keenly fixed on the incoming data that will be pertinent to the Fed’s upcoming rate decision. In his speech, Fed Chair Powell, very clearly teed up that the FOMC is likely to begin shifting rate policy downward beginning at their upcoming meeting. Currently, there are clear risks to both inflation and the labor market and the Fed is going to be forced to decide which risk outweighs the other. They have signaled that the risk to the labor market at this point in time now appears to be greater, which would drive upcoming rate cuts that the market has been hoping for. The only thing that could derail this plan is if the fresh data shifts the primary focus back to inflation. On Friday, we will get the July PCE inflation report and on the heels of a scorching-hot July PPI report, this report is sure to garner heavy interest from investors. The market is expecting Core PCE for July to have risen by 0.3%, which would put the YoY rate at 2.9%. Investors will hope for this report to produce a downside surprise which would help to confirm the Fed’s apparent current bias that rate cuts are needed to address the labor market. However, if this report comes in hotter than anticipated, expect some cold water to be thrown on the market’s hopes that rates will begin being lowered in September. The inflation and labor market data between now and the Fed’s September meeting is going to be a major market event and deserve trader’s attention.

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