After several weeks in which stocks relentlessly rallied higher, last week investors finally decided to pump the brakes a bit, allowing the scorching hot rally to cool off a bit. After opening the week, setting a new all-time high in Monday’s trading, traders quickly entered ‘risk-off’ mode for much of the rest of the week, taking some profits and allowing stocks to retreat from broadly overbought conditions. Stocks were truly due for a slight dip after gaining so much ground in just two weeks’ time, traders just needed a catalyst to begin to push prices down. Eventually the market found several things to commence the selling, market valuation, questioning whether the immense A.I. spend is justified, & some anxiety about the PCE inflation report that was released on Friday. Each of these items was prevalent enough in the mainstream discourse that they served as the catalysts needed to get the S&P 500 to retreat to the middle Keltner channel. Now, on the week, the major indexes only finished down marginally as buyers stepped in on Friday and bought the dip quite strongly. Once Friday’s PCE number was reported showing that there had not been any further acceleration in inflation, this was the ‘green light’ traders needed to step back in to the market and begin taking on some new risk. Overall, even though the indexes finished down last week, the trading was very encouraging. As the market had gotten significantly overbought in the short term, the pullback was needed to maintain a healthy market balance. Then once the pullback occurred, seeing the buyers flock back to the market in masse on Friday was a strong confirmation that investors are still very much of the ‘buy the dip’ mentality, so this was a successful test. Per usual there are hurdles ahead for the market, but last week’s developments were overall positive for the outlook of this rally.

            The technicals and internals continue to look strong for this market. The S&P 500, our key read on stock’s broad health, remains trading above both its 50 & 200 day moving average, confirming a strong trend. Furthermore, prior to last week’s pullback, the index was also making new highs yet again, which we take as a powerful bullish signal. Combine this with the chart continuing to make a pattern of clear higher highs and higher lows, this type of trading is very encouraging. Looking at the internals, we also see positive signs here as well. For the S&P index, we still see a high percentage of stocks trading in a long term uptrend, with nearly 64% of the index’s constituents confirming this. The index’s Advance/Decline line tells a bit more tepid, yet still strong story. This A/D line has moderated in recent weeks even as the underlying index has made numerous new highs. However, despite last week’s pullback, the A/D line is still only marginally below its all-time high. This is an indication of the rotation that has been occurring in this market under the surface over the past few weeks. In a long lasting bull market like we are currently experiencing, rotation is the life blood that can keep it going much longer, so everything we are seeing here is encouraging for the next few months.

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Key Events to Watch For

  • Fed Member Speeches
  • Fresh Labor Market Data (Probably)

It’s now been nearly two weeks since the Fed held their last meeting at which they opted to cut their policy rate. The market is still highly focused on the Fed and their rate cut trajectory and hopefully for investors, we’ll get a bit more clarity this week. We have had several relevant data points come in since the recent meeting and this week is going to provide a key platform for Fed officials to continue to speak and message about our economy and their thoughts on rates cuts. By my count, there are seven separate speaking event for Fed members this week, so this will be a heavy ‘Fed Speak’ week as markets digest their comments. Investors will certainly be hoping for an overall dovish message, confirming the market’s bias that the Fed is likely to still be tilted toward cutting at upcoming meetings.

            As mentioned before, this market is still keenly focused on rate cuts and the Fed. With the Fed clearly communicating that they are going to remain data dependent and make decisions based upon that data, it’s crucial for traders to understand key data points as they come in and know what the results mean for stocks. This week, several key labor market reports are due, however there is a bit of catch. Currently the government is at risk of a temporary ‘shutdown’ beginning on Tuesday at midnight unless a deal is reached. Any student of history knows that more often than not, these disagreements are very political, involve a lot of posturing, and generally are resolved just before the deadline, avoiding any shutdown. However, as a deal has not been reached as of writing this newsletter, there is still the risk, albeit small, that the government does shut down. These situations typically have a small effect on the stock market, however this week if we get a shutdown, it could introduce some short-term volatility. Since several key labor market data points are due this week from the BLS, if the Federal government shuts down, those reports will be temporarily delayed, which the market would not like. This is something for investors to keep their eye on. That aside, Tuesday’s JOLTS report should not be affected and the forecast is that this will continue to show a minor contraction in Job openings in the U.S. economy. The report in question is the Jobs report due on Friday morning before the market open. Hopefully we will get this data print on time, but the median expectation is that in September the economy added an unimpressive 45K jobs. This would be an improvement over August, but still a very small number. Also, the unemployment rate is projected to remain static at 4.3%. Investors will likely be hoping for these number to come in roughly in line with expectations as this will help to confirm that additional cuts are on the way. Friday’s report, if delivered on time, will likely be the major catalyst for traders this week.

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