Morning Brief: Reasons The Bulls “Have Cause To Fear” Before Jackson Hole

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Jared Blikre, a market writer for Yahoo Finance, is the author of today’s newsletter. Follow him @SPYJared on Twitter. The S&P 500 (GSPC) is experiencing a breadth issue. After a substantial 17.4% gain for the S&P 500 from mid-June lows to mid-August highs, the summer stock market boom stalled last week. But reiterating a criticism of the so-called FAANG period that predominated in the years prior to the pandemic, only a handful of stocks—Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Tesla—once again did 30% of the heavy work (TSLA). And this current rally appears more problematic than a few shaky sessions might otherwise imply as these trades lose momentum and offenders like the strong dollar once more make their presence known.

After encountering significant trend line resistance, Apple, possibly the most significant bellwether stock on Earth, experienced its worst two-day decline in two months on Friday and Monday. With this decline, the stock broke a different, sharp trend line to the downside; it is currently trading at its 20-day moving average. With its stock having dropped by nearly 30% between late March and mid-June, Apple impressively recovered throughout the summer, rising to within 4% of its all-time high. But because to this abrupt turnabout, Apple share prices are currently unstable. Microsoft managed a 21% rally within the same time frame, bringing the stock to within 16% of its record high.

Morning Brief Reasons The Bulls Have Cause To Fear Before Jackson Hole
Morning Brief Reasons The Bulls Have Cause To Fear Before Jackson Hole

But five days later, the stock’s daily candlesticks are confirming an island reversal pattern. Amazon is in a similar situation, but it is still “on the island” and has been consolidating recent gains that reached a peak of 45%. Elon Musk’s Tesla, meanwhile, appears to be doing slightly better following a 50% surge that wasn’t quite as extreme and unsustainable as Apple’s. However, the stock has been unable to break through the midpoint of its slide from record highs, signalling shorts continue to have the upper hand over the longer term. Only at a share price of $1,000 or above would we anticipate Tesla bears to start selling out. Of course, none of this would be so alarming if the market as a whole had participated more in the build-up. It’s true that some market internals metrics have recently flashed optimistic signs.

For the first time in more than a year, the percentage of S&P 500 components trading above their 50-day moving averages, for example, exceeded 90% last week. The high yield bond market and the semiconductor industry, however, underperformed during the summer’s rise and have since quickly turned around. Markets can only move so far on junk-off-the-bottom rallies that are short covering. Bullish investors are anxiously awaiting Federal Reserve Chair Jay Powell’s Friday morning keynote address at Jackson Hole as they count down the seconds. The majority of experts, though, believe that investors should disregard a Powell flip this early in the Fed’s rate-hiking cycle.

At his news conference in late July, the Fed chairman made it clear numerous times that the organization’s future decisions will largely depend on the incoming data, i.e., inflation statistics. More concerning for the market is the fact that, according to Michael Hartnett’s team at BofA Securities, U.S. stocks accounted for 86% of global equity gains during the most recent rise. It’s no accident that the current risk rally thrived when the dollar cooled from its rapid ascent higher when we turn our attention away from the U.S. stock market. A 7-session comeback in the U.S. dollar index (DX-Y.NYB) erased a 20-session fall of same magnitude, bringing the dollar back up to two-decade highs, so this reprieve is in fact just temporary.

The euro is once again trading below parity with the dollar, which is good for visitors but bad for Europe, which is currently experiencing a recession and is setting the global economy on a downward trajectory, according to some experts. Expect little assistance from the Fed unless Powell says something that destabilises the dollar’s enviable position. Any indications from Powell that the Fed’s programme of balance sheet reduction, or so-called quantitative tightening, which is exerting pressure on currencies, bonds, and money markets, may come to an end would be welcomed by investors searching for the next optimistic catalyst. But as the Bank of America Global Research equities derivatives team said in a note on Tuesday, “We believe risk assets have reason to worry about Jackson Hole.” Investors would be better off as always by simply not opposing the Fed.

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