The market is showing signs of a near term top as the Dow & S&P 500 negate big breakouts after trading in a very tight range over the past 8-weeks. On Friday, stocks sold off hard after the Fed’s Rosengren, who’s been dovish, changed his stance and made the case for a rate hike at the September meeting. We do not think the Fed will raise rates in September but our opinion doesn’t matter, the only opinion that matter’s is Mr. Market.
There was a lot of damage last week as the Dow Jones Industrial Average and the S&P 500 both broke down below their respective 50 day moving average lines. The Dow and S&P 500 negated their big base breakouts and are back below 2015’s high of 18,351 and 2,134, respectively. The short and intermediate term trend is now sideways as the long term trend remains up. We are also seeing several important areas that had been leading the market higher since the Feb low begin to break down. Some of these areas are: gold ($GDX), steel ($SLX), utilities ($XLU), consumer staples ($XLP), and healthcare ($XLV) stocks, just to name few. Clearly a defensive stance is warranted until the action improves.
A Closer Look at What Happened Last Week…
Mon-Wed Action:
Stocks were closed on Monday in observance of Labor Day. On Tuesday, stocks rallied as investors returned from the long holiday weekend. Over the weekend the G-20 held their latest meeting but didn’t agree to anything substantial. On Tuesday, the ISM non-manufacturing index fell to a 6.5 year low and missed estimates. This was the latest in a series of weaker-than-expected economic data points which reducing the odds of a Fed rate hike anytime soon.
Stocks were quiet on Wednesday after the Fed released its beige book and Apple launched new products. The Fed’s beige book showed modest growth across most of the country which was largely expected and barely moved the needle. Separately, Apple announced several new products, including a new iPhone 7, which is water resistant and will be the same price as the iPhone 6. Under the surface, the action remains healthy as the Nasdaq 100 hit a fresh record high and the transportation stocks also had a nice day.
Thur & Fri Action:
Before Thursday’s open, the ECB held their latest meeting and did not increase or extend QE and held rates steady. Initially, that disappointed some investors who wanted more easy money from the ECB. Mario Draghi, head of the ECB, said the European central bank did not discuss an extension of QE but did say the program will run until the end of next March or beyond, if necessary. Of course, this is his way of hedging his bets in case they decide throw even more money at the process. Oil prices jumped over 4% which helped a slew of oil stocks breakout above important near term areas of resistance. Stocks fell hard on Friday after the Fed’s Rosengren, who’s been dovish, changed his stance and made the case for a rate hike at the September meeting.
Market Outlook: Stocks Are A Little Toppy
Stocks are acting a little toppy in the near term. The fundamental driver continues to be easy money from global central banks. Economic and earnings data remain mixed at best which means easy money is here to stay. As always, keep your losses small and never argue with the tape.
