On the heels of the long holiday weekend, markets opened on Tuesday and the week featured some quite choppy trading. Just before the long weekend began, on the prior Friday, a news headline broke that many of the Trump Admin’s tariffs had been ruled unconstitutional by a federal appeals court. This headline moved after the market had closed, so markets had three days to digest this before the next trading day. While on initial thought, many felt the market may leap higher at the prospect of many of the new tariffs being scrapped. However, once markets opened on Tuesday, almost across the board stocks were sharply lower because of what was happening in the bond markets. If in fact these tariffs remain unconstitutional and this is upheld by the Supreme Court, there is the possibility that the Treasury would have to refund much of the collected tariff revenue and the idea of this put significant upward pressure on long-term treasury yields which in turn created the strong selling pressure on risk assets like stocks. So, while stocks endured a pretty sharp day of selling to begin the week, they did recover quite quickly. A key A.I. player- AVGO, reported earnings last week and delivered a blowout quarter and much stronger guidance than was expected. This gave a boost to much of the market. Building upon this, Friday brought us the highly anticipated August Job’s report, which delivered quite a weak number of new jobs added and the unemployment rate ticked up, however, it was satisfactory the markets. Friday was one of those odd scenarios where ‘bad news’ was received as ‘good news’ by the markets. Since investors are so focused on interest rates right now and are eager for rate cuts, any bit of data that can help to confirm that rate cuts are on the way is being cheered by investors. Of course, weak labor reports will not continue to be cheered by the market for long, however, at this moment in time, it was exactly what markets were looking for. Early in Friday’s trading, stocks experienced a broad rally with all three major indexes making new intra-day highs before settling a bit lower by the end of the session. After the weak Job’s report, long-term Treasury yields plummeted to the lowest levels seen in several months. Additionally, the odds of a larger rate cut at the upcoming Fed meeting began to rise. This is why at least in the short term, the bad labor market news actually helped to cause a rally in stock prices. Expect investors to be watching incoming macroeconomic data closely in the weeks to come because clearly long-term treasury yields are a major driver in this market.

            Following last week’s trading that featured both some ups and downs, the technicals and internals are telling a strong story for stocks. Each of the major indexes has been making strong series of higher highs and higher lows, including numerous new all-time highs lately. The technicals for each of these indexes continue to signal strength with the indexes trading above all significant trendlines and each one only sitting marginally off of their respective all-time highs. Looking deeper, the recent trend of broadening out has continued. Looking at the Advance Decline line for the S&P 500, this line has continued to set a series of higher lows and sits on the verge of making new highs. This is a strong signal of improving breadth and that with any dip in stock prices there are plenty of investors willing to step in and buy. Additionally, the percentage of S&P stocks trading above long-term trendlines is continuing to improve, further signaling improving strength across this market. Each of these signs of improving breadth is encouraging for the trajectory of stock prices headed into the final few months of the year.

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Key Events to Watch For

  • Inflation Reports (PPI & CPI)
  • ORCL Earnings

As we head into next week’s Fed meeting where investors are broadly expecting the FOMC to reduce policy rates, this week will bring us two fresh data points that will be key inputs into the Fed decision. On Wednesday & Thursday the August PPI & CPI reports will be released. Currently, the market’s opinion is that the greater risk for the Fed is the labor market and while the market is all but guaranteeing a rate cut at the upcoming meeting, there are whispers that a larger cut could be in play. These two inflation reports will be crucial in determining whether a larger cut is a likely outcome or if inflation continues to show upside movement the Fed may be put in a tough position even amid a quickly slowing labor market.

            This upcoming week will be relatively light on major earnings reports, however, there is one significant company on the schedule this week which stood out to me. On Tuesday, after the closing bell, Oracle Corp., symbol ORCL is due to report their Q2 results. The Street is expecting ORCL to post EPS of $1.48, which would mark a modest rate of growth. As ORCL is a key player in the A.I. infrastructure build out, this report will surely attract a great deal of investor attention. ORCL has been a big winner YTD, but the stock has stumbled a bit of late. If the company can deliver a strong report and perhaps more importantly strong guidance, expect this stock to resume its uptrend.

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