Investors entered last week’s trading still riding the high from the previous weekwhen Fed Chair Powell struck a dovish tone, signaling that rate cuts were on the way.This enthusiasm quickly shifted into a new focus as there were several key market-moving events last week. Last week’s primary event that had everyone on pins and needles in anticipation was the Q2 earnings report from NVDA. Many expected a strong report from NVDA, but the real key was the Q3 guidance. Fortunately for the market, NVDA delivered, just as many hoped. They posted a strong top and bottom line beat, plus they issued strong guidance which provided some support for the market bulls. Following this, the next morning we got an updated Q2 GDP number where the number was actually revised higher, signaling an even stronger Q2 for the U.S. economy than was previously thought. This was another feather in the bull’s cap and the combination of these two events along with the building bullish sentiment on the back of Powell’s speech gave the market the push it needed to grind out several new all-time highs on the S&P 500. However, on Friday, these gains were given back once the PCE inflation report was released.  While the report came in, in line with expectations, the Core PCE reading indicated that inflation had risen to 2.9% YoY, on the verge of running with a 3-handle. This was a further sign that inflation is once again headed in the wrong direction which warranted some concern from markets. Investors displayed their concerns about inflation by selling stocks to close out the week resulting in each of the three major averages closing down on the week. Despite the late week selling, the strong NVDA earnings news was a box that needed to be checked for this bull market and the revised GDP report from Q2 gives us confidence that while the economic picture is not perfect, there is still solid growth that occurred which should be supportive for stocks. Furthermore, we are seeing many classic signs of exactly what one would hope to see in a bull market. We’re seeing Discretionary outperforming Staples, Tech outperforming Healthcare, these are signs that risk is beating defensives. Also, the recent trend of broadening breadth is still at play, and this is best illustrated by the rally in small caps. The Russell 2000 continued to break out to new short-term highs last week. All of these are indications of a broad bull market with healthy levels of participation which is exactly what we want to see.

            Now as we head into this shortened week of trading, there is plenty for investors to be looking out for. But before we dive into that, let’s just take a quick read on the market technicals and internals to see what they can tell us. Looking at the S&P, of course, the technicals are strong. The index hit two new all-time highs last week and is now only marginally below those highs. Additionally, the major trendlines all confirm that the S&P 500 is in a powerful bullish uptrend and has been for some time now. However, despite the strong run, the technicals are not suggesting that the index is overstretched at current levels. Now, looking a bit deeper at the S&P 500 Advance/ Decline line we can see that the line is continuing to make a series of higher highs and higher lows, mirroring the index itself. This is a strong internal sign of broad participation to the upside and exactly what we’d like to see. This is also confirmed by looking at the percentage of S&P stocks trading above their 200-day MA, still remaining around the high 60’s. Now, with that said, it is important to note that even with the recent new highs, the index has lost much of its velocity to the upside. Looking at several of my momentum and velocity indicators, it is clear that the index has been in a slow grind higher and is in search of a new catalyst to really ignite the next leg higher as much good news has already been priced in. Perhaps this could be an upcoming rate cut, but over the past three weeks, even though the market has ever so slightly carved out a few new highs, it has remained in a pretty tight range. This is also partly explained by the churn and rotation we have experienced in markets over recent weeks. While the rotation and broadening are welcome signs, it is expected that this would slow the upside momentum trade as it plays out. This week has several key events on the calendar that could serve as the accelerator to get this market regaining its upside velocity again.

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Key Events to Watch For

  • August Jobs Report
  • Senate Hearing – Fed Appointment
  • Earnings (AVGO & CRM)

Currently, it is no secret that this market is wanting and expecting several rate cuts on the near horizon. However, the picture remains complicated as inflation remains stubborn even as data shows that the labor market is beginning to slow. Having these two economic elements in conflict with one another puts the Fed in a bind when it comes to a rate decision. Because of this, investors are fixed on the pertinent incoming data. This week, we get fresh numbers on the labor market. On Friday morning the August Jobs report will be posted, and the expectation is that the economy added 75K jobs last month. After July’s report not only reported a disappointing number of jobs added, but also featured significant downward revisions to the previous months, this report is sure to garner lots of attention as it could have ramifications on upcoming Fed decisions. From the stock market’s perspective, this setup on this one is tricky. Markets seemingly would want a good report, but not too good as to jeopardize upcoming rate cuts. If we get a report that is in line with expectations and does not feature further downward revisions to previous months, this is probably the best case scenario for stocks.

This Thursday will feature a bit of a unique market event, a Senate nomination hearing for Fed Governor appointee, Stephen Miran, the newest appointee from the Trump Admin. Currently, there is no shortage of headlines regarding the Fed, primarily concerning its independence. This will be the first procedural step in the confirmation process for Miran. With the next Fed Policy meeting rapidly approaching, we expect these hearings to be expedited as it is clear the administration wants as many dovish voting members in the room as possible. This is somewhat unsettling for markets as concerns for the Fed’s independence are rising. It has not translated into price action quite yet in a major way, but it is clear that investors are quite leery about what is happening with the Fed. Keep an eye out for this hearing as it could be a spark for some market concern.

            The last key thing that investors should be watching for this week are a handful of earnings reports that will provide some helpful insights. Both Broadcom (AVGO) & Salesforce (CRM) are set to report earnings this week. Up first will be CRM on Wednesday and the market is expecting $2.78 in EPS from them.  Then on Thursday, AVGO will report following the closing bell and they are expected to post Q2 EPS of $1.66,  a significant jump YoY. The software trade has lagged much of this year, and CRM has not been immune to this. A strong quarter from CRM could help to jump-start this stock price. Meanwhile, AVGO is one of the big winners of the A.I. trade and all expectations are that they will continue to deliver impressive results with this report.

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