Powell Walks Back Cuts
The S&P 500 closed the week unchanged after pulling back and bouncing almost perfectly off of the daily 20 SMA and FOMC low.
The precision of the bounce strikes me as an indication that stronger sellers are still not getting active in this market.
Powell Induced Pullback
The pullback started last week with Powell giving a speech at the Greater Providence Chamber of Commerce Economic Outlook Luncheon, in Rhode Island.
In the conversation Powell had a tone of being unsure about the future of rate cuts. Certainly more hawkish than newly appointed Stephen Miran who the day just prior made a case for the neutral rate (r*) to be close to 0. (wild…)
Feel free to read the full outline here: Miran Wants 0 R*
What the market particularly keyed in on though was Powell’s comments on valuations.
“We do look at overall financial conditions, and we ask ourselves whether our policies are affecting financial conditions in a way that is what we’re trying to achieve,” Powell said. “But you’re right, by many measures, for example, equity prices are fairly highly valued.”
Markets effectively fell 0.5% on this comment and continued to pullback through the Thursday morning session.
Although the comment may have acted as a catalyst for an intra-week move lower, nothing really changed under the hood from a trend, risk appetite, or breadth perspective.
Economic Data Surprise
On Thursday morning economic data surprised the market by coming in much stronger than expectations leading to a gap down.
We’re in the phase where good news is actually “bad news,” as it implies pushing rate cuts further into the future, or just not reaching as low of a neutral rate as the market may have liked.
- GDP – 3.8% actual vs 3.3% estimate
- Durable Goods – 1.9% actual vs -0.4% estimate
- Initial Jobless Claims – 218k actual vs 235k estimate
Post data, the market has priced in achieving a floor of 3% Fed funds by next September:
This Fed and rate tension will remain a top focus this week as we head into more labor data and ISM Manufacturing & Services PMI reports.
Given the somewhat volatile labor data through all of the recent NFP revisions, it wouldn’t be surprising to see the market forecast completely wrong.
Recent market reactions have been mixed, but there is a theme that weaker data leads to an initial gap higher, noting the increased prospect of rate cuts. Intraday, the gaps fade or in the case of the July report (released August) continue lower.
In each of these instances hindsight proves that they are great higher low buying opportunities.
The trouble with this theme outlined above is that if we gap down, or break Thursday’s organic higher low, the trend will actually flip to down coming from a potential lower high.
In the prior examples, the moves were pullbacks from the highest highs of the current trend count.
Trade Brigade Live Squawk
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Broad Market Analysis
SPY – Weekly
Indecisive doji at the ATH. Failed to close over prior week high after making a new high. Doesn’t guarantee a pullback, however if something does emerge, plenty of room for a HL.
SPY – Daily
Great hold of a firm higher low now at the FOMC soft higher low and daily 20 SMA. That 654 will now be the LiS for uptrend to remain in tact. Ideally buyers hold over the range low at 660.4 to keep pressure to the upside early week. ATH has unfinished business at 667.25.
SPY – Hourly
Base case pathing is for buyers to keep stepping up in white after this daily higher low and hourly trend change back to up. The red path of course will look like head and shoulders lower high should it play out. Under 654 is where things get nasty.
Market Internals
Generally Friday’s 1h trend reversal is supported by context that is bullish after a mild dashboard Tues/Weds/Thurs. Really no indication of stronger sellers getting active yet.
Market Profile
After an early week of double distributions and value shifting lower, note on Friday’s trend reversal, value did indeed shift higher. Next big recapture is Friday low which aligns with the Mon/Tues lows and Weds single prints.
XLF – Daily
This is likely the most concerning sector chart to me still, with the failure to go higher out of the range as the market was making a new high. Larger issues when and if the bottom of the range gets taken at 52.9.
If you want the full take, including all of the nuance of breadth, risk appetite and much, much more, check out the weekend episode here:
Economic & Earnings Calendar
- Labor data – Remember bad new is good news at first then fades based on recent trend
- ISM Services PMI – Prices paid will help us gauge continued inflation pressures
Top watches: NKE
Swing Stock Scans
ADI – Daily
Multi-week base in force with a potential breakout over 251.15 to get back to ATHs at 258. Over that its blue sky territory. If price can exit this recent range look for volume to support any momentum move higher.
BTSG – Daily
Bull flag at the ATH after a nice hold of the daily 20 SMA (orange). Looking for 28.25 ATH breakouts on high volume to attempt blue sky territory. Not interested if this fails the consolidation lows at 26.
MLYS – Daily
Another bull flag at the ATH after a major gap and go. If this can catch a second winds after consolidation look for volume to come in and support this into new highs. Very mild pullback last week considering what the broader market did.
PSTG – Daily
Revisiting this one after the earnings ATH flag break. Great retest underway and back to back daily hammers. Looking for a move over Thursday/Friday high to get back to the ATH and cement a higher low on the daily timeframe. Not interested if price breaks below 80.5.
TSSI – Daily
Almost text book inverted head and shoulders pattern offering a Brigade Bolt retest over the neckline. If 19.55 can break, looking to target the gap fill area up from 23.15 towards 27.6. Failing the 16.25 neckline would be a red flag.