This past week’s trading revealed that investors are largely stuck idling in neutral right now as several points of uncertainty are for now, tamping down the bullish animal spirits. Right now, the concern that is front and center for markets is the new war in the Middle East, as tensions flare with Iran. Last week we saw Israel and Iran trade several volleys of attacks on one another before ultimately seeing the U.S. enter the conflict over the weekend. During the past trading week, the escalation of this fight kept investors on their heels as they worried about any potential downstream inflationary effects as a result. Of course, this was not the only event last week that was affecting markets. We did get an updated retail sales report last week and it served a disappointing number as retail sales in May declined more sharply than was expected. Wall St. was expecting this May retail report to be a weaker one as a great deal of demand had been pulled forward into April, however the drop off in May was more than forecast. Then finally on Wednesday the Fed wrapped up their June FOMC meeting and released their policy decision. As was expected, the committee opted to keep their policy rate unchanged and are continuing to evaluate fresh data as it comes in. In addition to the rate decision, the FOMC also released their updated SEP report which indicated that the average Fed member is expecting slightly higher inflation this year than previously expected, but also that the committee on average is still anticipating two rate cuts this year. The market’s opinion of the meeting was seemingly that the result was largely as expected but somewhat disappointed by the heightened inflation expectations. Despite having many of the week’s headlines working against stocks, each of the three major averages were positive on the week at the market close on Wednesday. However, due to great weekend risk that currently exists with the new war in the Middle East heating up, on Friday, we saw another big move to de-risk into the weekend. This Friday selling mirrored what we experienced just one week prior, and this was enough to push the S&P 500 into negative territory for the week.
After a second consecutive week, where stocks continued to see momentum fizzle out as they were largely bound to a tight consolidation trade, looking at the technicals for the market, they still look quite strong. As I had written in previous weeks, the S&P 500 had gained so much ground so quickly off of the April lows, stocks were due for a cooling in momentum and the geopolitical flareup just served as the catalyst to finally cause it. Despite the slowing momentum, the strong bullish trend that began in April is still intact as the S&P 500 is still making a solid series of higher highs and higher lows which is a positive sign. Furthermore, the index is still trading above key support levels that have formed over the past month. If we get a bit of a pullback as investors weigh the current geopolitical landscape, it will be important to see the S&P 500 hold above support at the 200-day moving average. One thing that shockingly I have heard very little discussion about is a massive new technical ‘Buy’ signal that is currently shaping up on the charts. The signal that I am referring to is a ‘Golden Cross’ on the S&P 500, where the 50-day moving average crosses above the 200-day moving average. Now, this signal has not occurred quite yet, however, at the rate things are tracking it is very likely that we will see this signal materialize later in this coming week or perhaps early in the following week. This signal is so crucial and widely tracked because it has a high accuracy of predicting large bullish moves that follow. Over the past 30 years, many of such signals have occurred and the average S&P 500 index return following them before a ‘Sell’ signal forms is roughly a 20% rally. Of course, there are no guarantees in the market, but if history is any guide, when this ‘Buy’ signal triggers in the near future, this typically foreshadows strong performance to come in the following year. So, keep your eye out for this one. Finally, we are still seeing the best strength in the headline S&P 500 index as it is still displaying better relative strength and outperforming the equal-weighted counterpart. Because of this we are keeping our focus on the strongest sectors while waiting for the others to catch up.
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Key Events to Watch For
- Geopolitics (Middle East Tensions)
- Initial Jobless Claims
- May PCE Inflation Report
Following another week where tensions continued to ratchet higher in the Middle East as Israel and Iran continue to attack one another and now the U.S. has become directly involved after bombing several Iranian sites over the weekend, markets are acutely focused on this issue. As of now there still has not been a major disruption in global energy markets, which is certainly positive for stocks. The absence of this major energy disruption has allowed investors the chance to pause and evaluate new events as they unfold in this conflict, which in turn has allowed stocks to avoid any significant degree of selling pressure as of now. On Friday, it was announced that this week Iranian officials are planning to meet with a contingent of European officials to attempt to iron out some final hour peace agreement in order to de-escalate this new hot war. After the U.S.’s strikes over the weekend it is unclear if negotiations even remain on the table. Investors will continue to be keenly focused on this issue and will be hoping for de-escalation to avoid any inflationary energy shocks and economic disruptions.
It has been some time since this particular piece of macroeconomic data was on our radar, but it is starting to pop back up again. I’m referring to the weekly U.S. initial jobless claims. Weekly initial claims are one of the best ‘leading indicators’ on our domestic labor market. For much of this year we have been averaging around 215K new claims per week, which is quite tolerable for markets. However, in recent weeks this number has begun to trend higher. To be clear, we are not at a concerning level as of now and there is reason to believe that much of the recent rise can be attributed to seasonal factors and recent federal government layoffs which have slowed significantly. But the point remains that the trajectory of this data has taken a turn higher with the 4-week rolling average now coming in around 245.5K. If this average continues to jump higher from here this is going to begin to spook markets as it will signal that perhaps this is less of a blip in the data and instead a trend showing increasing weakness in the labor market. This weekly data point should be watched closely over the next few weeks. The next report will be posted on Thursday morning prior to the market opening.
Of the scheduled events for this coming week, the final one that we are watching closely will be the May PCE inflation report. Given the ongoing overhang of tariffs and their effect on consumer prices, investors are closely watching every inflation data point as it comes in. Now, recently we did get the May CPI & PPI inflation reports, each of which came in cooler than expected. The PCE report shares many of the same elements from CPI & PPI, so because of this investors are expecting a more dovish PCE report this week. With that said, this is the Fed’s preferred measure of inflation so getting another positive inflation print here will be supportive for stocks.
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
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