Market Journal – Issue 29

Summertime Selling

Welcome to the twenty-ninth edition of the Market Recap & Outlook Report. Junior Analyst and Member Dividend Dollars reviews economic data releases, notable earnings, and other remarkable news and uses that information in alignment with technical analysis to establish opinions on the market’s outlook. That information is consolidated and compiled into this report every week for publication on their website and ThetaBandits.com.

Dividend Dollars is not a trader nor investment analyst by practice or profession. They are learning within this server just like many of our members. Therefore, nothing should be taken as financial advice. Rather, this report is just another resource within our toolbox and should be used to provide additional information and opinions on the market and its happenings. Enjoy reading!

Dividend Dollars’s Outlook & Opinion

Last week we didn’t call a bullish or bearish outlook for this week. We said technicals were poised for a bounce, but yields were rising and could cause some selling. We pointed to a +/-1% move with steady direction all week. This call out was sort of right. Yields continued to rise higher, and stocks trended down for the whole week.

Earnings season is nearly over, with 94% of S&P 500 companies having reported. 80% have beaten EPS expectations and 58% have beaten revenue expectations. Economic data this week had better than expected readings for retail, industrial production, employment, and trade while housing and inventories were worse than expected. None of the data was too amazing or too awful. Troubles in China and the release of the Fed minutes, in my opinion, were the largest catalysts this week.

From a technical standpoint, the $SPX support we were expecting at the 4,450 level (a level we have talked about for weeks now) did not last long. The confluence of the support there and the 50-day moving average failed in spectacular fashion on Tuesday. It may now be a stubborn resistance level for when the market moves higher, so let’s bookmark that thought. For now, there’s not much historical volume to go from at these levels, besides the activity in June, the last time the market was in this area, was over a year ago. I think the 0.618 Fibonacci level at 4,310 is the next target, which also aligns with the 100-day moving average, another confluence like last week! That level is also right above the old bull market threshold (4,292) and may provide some solid support.

For yields, the 2-, 5-, and 10-year Treasury yields are all at high levels not seen since 2007. Breaking above these levels would be a hugely significant indicator of the state of the economy. However, as we have seen time and time again in the data, GDP and the labor market are strong. Fed funds futures are expecting a less than 60% chance of a hike throughout the rest of the year. There seems to be a disconnect here, causing me to have the opinion that rates should be falling soon. If that happens, the bounce in $SPX may follow.

Wrapping up now, next week is lighter on the economic front with home data, job data, and sentiment data. Market sentiment indicators are mixed this week with $SPX open interest change, $VIX open interest put call ratios, and $VIX levels in general looking more bearish while ETF open interest change, CBOE and OCC equity volume put call ratios, and $VIX IV gap looking more bullish. There is a wide dispersion in indictors this week. A correction seems to finally hit stocks that got too far ahead of themselves, and the momentum downward seems strong, however a key support level is near. Bullishness for next week is not unreasonable, however the overall state of the market seems to be bearish, which is the direction that I will be leaning. Looking forward to a moderately bearish week next week and lots of chop around the key support area.

Weekly Market Review

Monday:

The indices had a mixed showing on low volume at the NYSE. There wasn’t a lot of conviction in either direction, which is consistent with late-summer activity and consolidation efforts. Losers had a less than 3-to-2 lead over winners at both the NYSE and the Nasdaq.

Mega caps had a disproportionate influence on index gains, leading to the outperformance of $SPY and $QQQ. The Vanguard Mega Cap Growth ETF ($MGK) rose 1.2% & the market-cap weighted S&P 500 logged a 0.6% gain. The Invesco S&P 500 Equal Weight ETF ($RSP), meanwhile, closed flat.

There was no economic data for Monday.

Tuesday:

Stocks had a weak day in a lightly traded session. The indices were steady with somewhat modest losses after $SPX found support near its 50-day moving average. Selling picked up in the last half hour of the day when the S&P 500 broke that level. The indices settled near their worst levels of the day and the S&P 500 closed below its 50-day moving average for the first time since March.

Investors were still contending with the idea that the market is due for a pullback after its hot run, which created valuation concerns. Growth worries were heightened by a batch of weaker than expected retail sales, industrial production, and fixed asset investment data for July out of China, and a warning from Fitch Ratings that it might be forced to downgrade the ratings of dozens of additional banks. Lagging bank stocks were a notable area of weakness. The Fitch Ratings warning came just a week after Moody’s cut the ratings of 10 smaller US banks.

The slowdown concerns led to the underperformance of cyclically oriented sectors and the relative outperformance of growth stocks compared to value stocks for the day.

Economic data included the retail sales report, US imports and exports, and NAHB housing index.

Total retail sales increased 0.7% MoM in July, beating an expected 0.4% and the prior 0.3%. Excluding autos, sales were up 1% MoM. Discretionary spending on goods continues to be healthy, providing another clue that the tight labor market continues to fend off hard landing scenarios for the economy.

Import prices grew 0.4% MoM in July and export prices were up 0.7% MoM. Imports doubled expectations and hit their biggest monthly increase since May 2022. Nonfuel imports prices were flat while export prices jumped 0.6% for non-agricultural. Import and export prices were still down 4.4% and 7.9% YoY, respectively.

Lastly, the NAHB housing market index fell to 50 in August, compared to an expected reading and prior reading of 56. High mortgage rates and building costs were cited as reasons for the dop in optimism.

Wednesday:

The stock market closed down, building on Tuesday’s losses on another light-volume day. Weaknesses were more modest in the early day, though, due to a lack of conviction from either buyers or sellers.

The S&P 500 hit its 50-day moving average after the open, but was unable to breach that key level, which spurred on selling interest. The indices had been trading in relatively narrow ranges until release of the FOMC Minutes from the July meeting induced some whipsaw action.

There was some knee-jerk selling in response to some hawkish sounding headlines from the minutes. For example, “most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.” That view wasn’t surprising considering the remarks made by Fed Chair Powell after the July 25-26 meeting. Altogether, the minutes didn’t contain anything too surprising.

Stocks rebounded from the knee-jerk selling but slowed down as the 10-yr note yield climbed above 4.25% and hit a closing high since last October. The S&P 500 closed just above the 4,400 level and at its lows for the session, continuing the consolidation trade that took root at the start of the month.

Festering growth concerns also contributed to the weakness after China reported another decline in home prices. Domestic housing starts were stronger-than-expected and so was industrial production in July. Also, the Atlanta Fed GDP Now model was updated and is estimating 5.8% real GDP growth in the third quarter, up from 5.0% previously. That news created some rate hike angst in the Treasury market.

Economic data for the day included the monthly new residential construction report, the weekly MBA mortgage application index, and the total industrial production report.

Total housing starts increased 3.9% MoM to a seasonally adjusted annual rate of 1.452M units. Building permits increased 0.1% MoM to a rate of 1.442M. The increase in starts in permits was modest, but it was driven by single family units which are badly needed in a supply tight existing home market. The weekly MBA mortgage application index fell 0.8% and refinances fell 2% while purchase applications were flat on the week.

Total industrial production increased 1% MoM, beating an expected 0.3% rise and a prior 0.8% decline. The capacity utilization rate rose to 79.3%, 0.4% below its long-run average and up from 78.6% in June. Total production was down 0.2% YoY. Most major market groups recorded growth in July, showing that there was a pickup in activity that fits with an economy that operates in growth mode despite the Fed’s rate hikes.

Thursday:

The indices closed on a downbeat note after trading flat in the early day. Initially, the S&P 500 was holding steady with 4,400 acting as a level of support. By the afternoon, a retreat had taken root leading the indices to close near their lows of the day and below 4,400.

The selling looked consistent with the consolidation mindset that has driven the price action so far this month. Another jump in market rates gave investors an excuse to take more money off the table. The 10-yr note yield rose to 4.31%, settling at its highest level since November 2007.

This weekly jobless claims data was indicative of a tight labor market, which also contributed to the move in the 10-yr note. Dow component Cisco ($CSCO) was a winning standout after its earnings report while fellow Dow component Walmart ($WMT) logged a decline after its earnings report.

Weekly initial jobless claims were the only data of note for the day. Weekly initial claims fell to 239k, just below the expected 240k and prior 250k. Continuing claims were higher at 1.72M. Initial jobless claims are a leading indicator and are paced at levels that are indicative of a tight labor market, which supports a soft-landing narrative.

Friday:

The market had a mixed showing on Friday. Early selling sent the S&P 500 to its lowest level in nearly 8 weeks while the Nasdaq slid to a 10-week low. The indices started to nudge higher around mid-morning on no news. There was a quick move higher in the last 10 minutes of trading that drove the Nasdaq into the green for the only time this session.

The S&P 500 closed flat, the Nasdaq fell 0.2%, and the Dow Jones Industrial Average rose 0.1%. The Russell 2000 had a slight edge, gaining 0.5% today.

Initial weakness was driven by losses in mega-caps, worries about China after property developer Evergrande filed for Chapter 15 bankruptcy protection in the US, and carryover downside momentum after the persistent selling in August.

There was no economic data of note.

That’s it for my recap! If you would like to see how I am building my dividend portfolio using my predictions/strategy written here, you can read about my buys in my weekly portfolio update on this link.

And if you like updates like this, follow my  Twitter  or my  CommonStock  page where I post updates on the economic data throughout the week. I have also started a Twitch Channel called Games N Gains! Every Thursday at 6PM MST I go live to hang out, play games, and chat with y’all about stocks, charts, fundamentals, and anything else you like! I hope to see you there!

Regards,

Dividend Dollars

Sources:

Disclaimer: This article is for informational and educational purposes only, not investment advice. We recommend researching and consulting with a financial advisor before making investment decisions. All actions based on this information are at your own risk.

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