The market held its collective breath ahead of Fed chair Jerome Powell's speech from a secure location remote from Jackson Hole, WY on Friday morning but he managed to pretty much keep everyone happy by saying nothing unexpected in a very soothing way. He pledged that interest rates would be kept near zero until the economy "reaches conditions consistent with maximum employment and inflation has reached 2%". We are a long way from that scenario so US interest rates will remain on the floor.
JP added that he did indeed anticipate that the Fed would begin scaling back the $120 billion/month of bond purchases “before the end of the year” , but this had become conventional wisdom anyhow and frankly proved to be no surprise to anyone. So the US stock market indexes chugged again from the Fed’s punch bowl and skipped their merry way to new all-time highs yet again.
Elsewhere, other nations are proving to be less patient than the US with a zero interest rate policy, South Korea and Sri Lanka have now raised interest rates and New Zealand may be not far behind. This could be the beginning of an international tidal wave of gradually rising interest rates.
Earlier in the week, markets had generally pushed higher on the back of a flurry of apparently positive news, punctuated by a brief dive after hearing of the horrors at Kabul airport. The budget resolution and infrastructure bills moved ahead and hopes (rather misplaced in my view) were raised that millions of vaccine-refusers have now run out of excuses and will rush out to get jabbed and the grand re-opening can recommence after the FDA finally fully approved the Pfizer vaccine. China clarified some of its more draconian restrictions on its own tech firms. US GDP numbers, while not spectacular, were decent.
Wells Fargo, past masters at misleading clients and the kings of untrustworthy self-interest, joined pals Goldman Sachs, JP Morgan Chase, UBS and Oppenheimer who all recently raised their price targets for the S&P 500 this year. However, based on all previous experiences of the accuracy of these targets, this information is about as much use to investors as a chocolate teapot.
With earnings season now behind us, investors will head into the coming week eyeing a few key economic reports, highlighted by the August unemployment report on Friday, but generally the calendar looks pretty quiet ahead of the Labor Day long weekend.
With "bad" weeks frequently followed right away by "good" ones and demand and supply numbers bouncing around erratically it seems that the market is trying to tell its story but is not doing so very explicitly. This could be a period of repositioning in advance of a change in trend from generally positive to generally negative or it could be simply an inflection point in an ongoing positive trend or it could be the start of a lengthy period of sideways trading. The primary trend has become unclear.
An important thing to recognize about all the green splashed over the screens last week is that it occurred on really low volume, made even lower by the waiting game ahead of Powell's Friday speech. Market fluctuations in either direction that may appear significant on the surface are always less consequential and less durable when they take place on low volume.
But there are also other causes for concern. For example, while the indexes are hitting new all-time highs almost daily here in August, the actual percent of stocks at or close to their one year highs peaked as long ago as March and has been in steady decline since. You have to look much deeper than the daily performance of the big three headline indexes (Dow, S&P 500 and NASDAQ). Although this participating market breadth of stocks is just one piece of the puzzle, it is an important and historically very predictive one.
The longer the market’s current divergence continues between the prices of the indexes and the number of advancing stocks, the more likely it could act as a sterner warning – potentially even of an approaching major market top at some point. To be clear, we are not there yet. However, erasing this ongoing divergence relatively soon is necessary in order to tilt the probabilities back in favor of a continuation of a vibrant bull market.
Relatively speaking ..
- The tech-heavy NASDAQ-100 outperformed the S&P 500
- Big bounce back for emerging markets as the best performing region ahead of US and international developed
- Small and mid caps took over last week, dominating large caps
- Growth stocks got back on top, outperforming value stocks
- The week’s best performing US sector: Energy (two biggest holdings: Exxon, Chevron), after spending the last two weeks at the bottom of the pile
- The week’s worst performing US sector: Utilities (two biggest holdings: NextEra Energy, Duke Energy)
Technical corner ..
- The proprietary Lowry's measure for US Market Buying Power rose 2 points while that of US Market Selling Pressure fell precipitously by 12 points
- SPY, the S&P 500 ETF, is still comfortably above its 50-day and well ahead of its 200-day moving average. It ended the week at yet another new all-time high
- QQQ, the NASDAQ-100 ETF, is still nicely above its 50-day and well ahead of its 200-day moving average. It ended the week at yet another new all-time high
ARTICLE OF THE WEEK:
Each week I'll link to an interesting article I have come across during the week.
This week: I am often asked if I had to recommend just one book as a must-read /listen in the field of personal finance, which one would I pick? I now always recommend the same book.
In this article, sixteen of its most profound lessons are listed.