Things you need to know.
– Stocks rally on some month end window dressing and the belief that JJ is done.
– Bond Yields decline, dollar up, oil up and gold up….
– It’s a bit week for eco data…. PCE and NFP are top of mind.
– Try the Dark and Stormy
**I will be joining Nicole Petallides today on Trading 360 on the Schwab Network Streaming service live from the NYSE at 11 am and tomorrow I am joining Maria Bartiromo on Fox Business – Mornings with Maria from 6 – 9 am. Please join me, won’t you?**
And stocks got off to a good start as we entered the final week of August as some investors and algo’s do a bit of month end window dressing….…. although trading volume was 30% lower than what it has been averaging and that is important why? Because with lower volumes and more people away from their desks moves can be (and are) exaggerated…so tread lightly….
Remember what happened on Friday…. JJ did exactly as we discussed – he kept it vague, he remained hawkish, he promised to keep rates higher for longer all while leaving the door wide open to change his mind if the data dictated it. In fact – his presentation was a repeat of what we already knew…. The economy remains strong, the job market remains strong, and the FED will be proceeding cautiously…. He didn’t commit to anything, and he didn’t rule anything out and his closing line said it all…. we will ‘keep at it until the job is done’.
And to my surprise stocks rallied on Friday – Why? Because he did not really surprise anyone – he kept it extraordinarily vague by design….Not wanting to box himself in to a specific policy path and nor did he want to send a dramatic signal to the financial markets…but in his attempt to NOT do that – there are some that as expected thought he did do that by being a bit dovish when he acknowledged that ‘current policy is restrictive and may work further over time’ – suggesting that rates will stop going up…apparently they didn’t hear him say that they ‘stand ready to raise rates further if the data demands it’. In either case – all of the recent rate hikes better work further over time because if they don’t then watch out for the hammer to drop again…. In any case – stocks rose on Friday and then they rose again yesterday.
At 4 pm – the Dow added 213 pts or 0.6%, the S&P’s up 28 pts or 0.6%, the Nasdaq added 114 pts or 0.8%, the Russell gained 15 pts or 0.8% while the Transports added 102 pts or 0.6%- this on top of the gains we saw on Friday and that has taken the S&P just 30 pts below trendline resistance at 4460 – and that is the number to watch (for now).
Remember – we discussed this….August to October is a seasonally weak time of year and so far August has had its challenges – the S&P down 4.6%, the Nasdaq down 4.6%, the Russell is lower by 6.6%, the Dow is off 2.8%.while the Transports are down 5.8%…..….and ‘global’ stocks are on track for the worst month in more than a year….all as central bank officials remain determined to kill inflation – a theme we heard from all of them at Jackson Hole. In the end – the focus will be all about the economic data this week and into September – ahead of the next FOMC meeting on September 20th. The data will either support the soft/no landing narrative or it will undermine it which means that traders and algo’s will either take stocks higher or send them reeling…and right now, it appears that it’s the former and not the latter.
And this is a big week for economic data…. Tomorrow brings us Mortgage Apps – will they continue to weaken? ADP Employment Change and that is expected to show 195k new jobs created, Wholesale Inventories of -0.3%, Retail Inventories of +0.5%, 2Q GDP of 2.4% Personal Consumption of +1.8%, Pending Home Sales -1%, Challenger Job cuts, Personal Income & Spending, the FED’s favored inflation gauge – The PCE Deflator and that is expected to show a gain of 0.2% m/m and gain of 4.2% y/y – which is slightly higher than it was last month, S&P Manufacturing PMI and ISM Manufacturing PMI both at 47 (contractionary) while Construction spending m/m is expected to be up 0.5%.
The week’ kicker though will be all about Friday’s NFP report….and that is expected to show a gain of 170k jobs…. The unemployment rate is expected to remain at 3.5%, Average Hourly earnings m/m up 0.3% while earnings y/y are expected to be up 4.3%. These are strong numbers and, in my opinion, will lead the street to realize that JJ may not be done raising rates all while others suggest that the numbers are will not be definitive enough allowing the FED to do nothing. Now, Fed Fund Futures did rise just a bit for a September increase after JJ’s speech – it is now showing a 22% chance of a 25-bps hike, while the November chances rose to 45% – up from 36%. So, a 22% chance of a hike – means that there is a 78% that we won’t get one in September…….and that is what is driving both stocks and bond yields.
Now bond yields declined yesterday as investors await the data (suggesting a pause) ….and they are weaker this morning…. the 10 yr. is now yielding 4.18% (recall it was yielding 4.25% last week), the 2 yr. is now yielding 4.99% down from 5.2% last week. Shorter duration 3- & 6-month bills continue to yield 5.5%.
Yesterday saw strength in 10 of the 11 major S&P sectors…. Utilities the only sector to be negative and they weren’t really that negative…. down just 0.02%…. Other than Communications – XLC that were up 1.2% – all of the other sectors rose less than 1%.
If you look at the broader picture –
The Value and Growth trades – SPYV and SPYG were both up about 0.6%, Metals and Miners – XME gained 1.1%, Semiconductors up 1.3%, Robotics and Automation up 1.4%, Aerospace and Defense up 1.2%, Airlines up 1%, Home Builders up 1%, Retailers up 1.25% – leaving that group up 3.8% ytd all while Consumer Discretionary – XLY is pushing 28% higher ytd. Energy as a group up 0.7% but those coal and Nat gas names I like were up even more…BTU + 1.2% and CRK + 2.2%. (Remember – both are way underperforming this year – down about 16% ytd.) The contra trades all ended lower – the SH – 0.7%, The DOG down 0.6% and the PSQ down 0.7%.
The VIX (fear index) has fallen 20% since last week – going from 18.50 to 15 and is now sitting right on trendline support at 14.76 and that has taken the VIXY ETF -14% during the past week as well. And that suggests that fear is subsiding – which opens the door to further gains ahead…. Just sayin…. But remember – any data point that suggests ongoing strength will keep the FED on the edge…. the edge of raising rates and that has the potential to slam stocks.
Oil is holding its own at $80.58/barrel – up from $77.70 last week…the headline makes it clear – “Oil Steadies as Demand Worries Counter Supply Concerns!”- Now it’s all about Hurricane Idalia – as it hurtles towards the gulf coast and then the Florida Pan Handle. Add this to the ongoing concerns about China and the Saudi production cuts…and you have confused pricing…..a slowdown in China suggests lack of demand while the hurricane and the OPEC cuts suggest a decrease in supply…..and so there you have it….so sit tight….I still think oil goes higher over the balance of the year – and expect the energy sector to lift its head…remember – the XLE is flat on the year….which makes some sense considering the blowout year it had in 2022 – but in the end – global demand for energy is rising and is expected to continue to rise….fossil fuels are not going away and renewable energy is still in its infancy.
The Dollar index is doing what? It continues to rise (and that suggests higher rates – higher rates equate to a stronger dollar) …. this morning it is trading at 104.07….as it continues to test the June highs…- a breakout here sets it up for a test of the March high of 105.60.
And you would expect gold to do what? Trade off – yet it isn’t – it is up $2 at $1948/oz…and that says that gold traders are not so sure about another hike or even if another hike will come….And so – the markets remain confused….and while we would all like to see a pause and a halt to rising rates….I am not convinced yet – that we are there…but that’s what makes a market – both buyers (represents rate pauses) and sellers (represents rate hikes).
Overnight -US futures were flat but turned higher at 5 and then lower again at 6 am…..Currently – at 6:30 the Dow futures up 10, the S&P’s up 2, the Nasdaq down 3 and the Russell is up 2 – this as investors/traders and the algo’s digest the latest moves up….and remember – this is the biggest week for vacations as we move into the long labor day weekend…..so again – tread lightly….Moves can be (and are) exaggerated..
European markets are also rallying…. this morning – all those markets are up between 0.5% and 1.5% as the ‘global rally’ continues….and traders and algo’s try to take back the August losses…. Expect investors in Europe to also pay attention to the weeks’ worth of eco data both here and across the zone.
The S&P ended the day at 4433 up 27 pts….….as there is some window dressing going on as investors try to pick up some perceived bargains…. We remain in the 4320/4460 trading range but continue to churn around 4400 as that has been a level that stocks are trying to rally around….a failure to hold that level will see stocks test support at the 4320 level….and while that may not happen this week – I suspect that we will see 4320 before we see a substantial move up from here that tests the year’s highs at 4615…. I still think that prices move lower into the September FED meeting…. which supports my ‘patience is a virtue’ mindset.
We are in the final trading days of August; I suspect lower volumes as we move thru the week which means we could get exaggerated moves in the indexes…. I would not make long term investment decisions based on this week…that cause you to feel like you’re missing it. You are not, you are invested so you are participating…. Don’t stress. September is almost here.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
“The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kace Capital Advisors.
It was August 30th in 2019 and Hurricane Dorian was getting ready to slam into Florida….and this week – Hurricane Idalia is getting ready to slam into Florida again…so try the Dark and Stormy…. (Hurricane Ian was the end of September of 2022)
Considering that the country is about to get slammed by Idalia and the future for stocks remains cloudy – let me repeat that cocktail that says it all.
The Dark and Stormy
For this you need: Dark Rum, Ginger Beer, bitters, and a lime slice.
In a tall glass – filled with ice – add the rum and then top with the ginger beer, bitters and garnish the glass with the lime wedge.
Buon Appetito