The most important week of trading since March 23rd

It is difficult to overstate just how important this week is for equity market traders and investors. I believe this week is potentially the most pivotal week since the week of March 23rd when equity markets not only put in a tradable bottom, but provided the spark and ensuing trade higher to put the shortest bear market in history behind us. Now that the inertia for that trade has clearly dissipated, as clearly evidenced by last week’s trade, the question is, is there anything on the horizon this week to help stabilize last week’s weakness and provide lift?

In last week’s note, I referred to a “Silver Lining.” As you remember, the “Silver Lining” I was referring to was the fact the in the previous week’s reversal lower, the Nasdaq found near term technical support at its 50 DMA. And not only did the Nasdaq manage an impressive bounce off its 50 DMA that trading session, but it did so on expanding volume. The Dow Industrials and S&P 500 followed suit thematically, though they did not trade down to their respective 50 DMAs.

As the Nasdaq Composite chart above clearly illustrates, the Nasdaq spent last week flirting with its 50 DMA. It was unable to muster any institutional enthusiasm, even 10% off its recent 52-week high. Yet, the selling pressure was not so great as to trigger a trade below the 50 DMA. One would normally expect some interest at a 10% discount. The fact that we did not see any last week is an indication that we may have a trade lower on our hands this week. It is very likely that if we see a break below the 10,853.35 level on expanding volume, we may see the Nasdaq Composite at 10,000 in the near term.
In an even worst-case scenario, the Nasdaq Composite may have to trade to what would normally be very predictable support at the 200 DMA. I am not calling for a trade below 10,000. To be clear, though, I do expect markets to take on some water this week; I do not see the buy side of this trade completely disappearing.

The S&P 500 closed -7% off its recent 52-week high last week. Not unlike the Nasdaq Composite, the S&P 500 closed out the week resting on its 50 DMA. The attempt to hold the 50 DMA was anemic at best. As the volume in the chart clearly illustrates, there was not much conviction. In the case of the S&P 500, the 200 DMA is 3100. Again, I do not see a sell-off of that magnitude materializing this week, but there clearly appears to be a lack of enthusiasm on the buy side.

Finally, the Dow Industrials closed out last week -6% off their recent 52-week high and actually gained ground last Friday by adding 131.06 points. Though the Dow Industrials average is only 6% off its recent highs, it too closed out the week hovering just above its respective 50 DMA. In the event the market turns lower this week, the Dow Industrial average is closest to its 200 DMA relative to the S&P and Nasdaq.

A couple of themes to keep in mind as it relates to how the major indices have fared thus far in the rally off March 23rd lows. As I suggested would be the case, roles have reversed for the Nasdaq Composite and Dow Industrials. That institutional rotation has been increasingly more delineated in daily trading over the past week. We will continue to see that rotation as investors continue to look for relative value. The tech trade had simply become entirely too crowded.
Additionally, leadership had and remains too narrow on the Nasdaq to mount a sustainable and broad move higher at the moment.

Lack of volume on the waning days of our COVID-19 themed trade higher, stretched Nasdaq valuations, thinning leadership, the post-stock split landscape for two of the largest names on the Nasdaq, and the end of earnings season on the horizon, have and will continue to fuel an uncertain trade marked by elevated volume on days that post sharply negative A/D metrics.

With COVID-19 still a significant factor in our uneven economic recovery, and likely to remain so in coming quarters, with a divided nation heading to the polls on November 3rd just weeks away, civil unrest in many of the nation’s largest cities, shootings and killings on the rise seemingly everywhere, and with former candidates insisting that one candidate not concede the election under any condition, it is a bit difficult to see where the impetus for a trade higher from here is. There are other significant political, societal, and economic factors at play here, but rather than turn this into a litany of negatives, I am attempting to simply be realistic. I remain a bull almost by default, but suspect the weakness we witnessed in last week’s trade is not likely to evaporate overnight.

Last week’s economic calendar highlights:

On Thursday, Weekly Jobless Claims were released, as per standard, at 8:30. For the week ending 9/5, the Initial Claims – Level results were unchanged for the previous reading – coming in at 884K. The prior week’s reading was revised to 884K. The four-week moving average slipped to 970.75K – down from 992.50K. The concern here is that we may be seeing the economy leveling off at this elevated level of unemployment. Also on Thursday, we received the Producer Price Index – Final Demand (PPI-FD) figures for August from the Bureau of Labor Statistics. The top-line reading M/M was 0.3%, Y/Y it was -0.2%. Otherwise, the balance of the report was in-line.

On Friday we received the Consumer Price Index (CPI) for August. The M/M reading was 0.4%. On a Y/Y basis, it was 1.3%. Ex-Food and Energy M/M was also 0.4%. No real surprises here – that is a net positive given all the uncertainty that is finally being priced into equities.

This week’s economic calendar highlights:

On Tuesday, the FOMC begins its regularly scheduled meeting. Always a focal point for investors, this meeting is no different. Industrial Production for August is out on Tuesday as well. M/M Econoday consensus is 1.2% – down sharply from the prior reading of 3.0%. However, and very importantly, capacity utilization is expected to tick up to 71.8% from 70.6%

Retail sales figures for August are out on Wednesday. Regardless of what they are, the Fed’s announcement and Fed Chair press conference later in the day will dominate the day’s economic narrative. Retail sales are expected to come in at 1.0% for August. The FMOC Announcement is scheduled for 2:00 pm and Chair Powell’s press conference is set for 2:30 pm.

No change in rates is expected. It will all be about what the Fed is expecting in coming quarters in light of the projected impact of COVID-19 on the ability of the economy to regain escape velocity.

FOMC Update

Housing Starts and Permits annualized for August are released on Thursday. Starts are expected to come in at 1.486 M, while permits are expected to remain strong at 1.530 M. Weekly Jobless Claims for the week ending 9/12 are due out on Thursday as well. Initial Claims are expected to come in at 850 K – down for the previous reading of 884 K. In eventuality, the 4-week moving average would tick marginally again.

The University of Michigan’s Consumer Sentiment for September (p) is scheduled for release on Friday at 10:00 am. Econoday consensus is 75.0. The prior reading was 74.1.

Flickr photo: by Andreas Komodromos

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