Stocks sank through support like it wasn’t there, opening the door to a flush toward the June lows, notes Jon Markman, editor of Strategic Advantage.
That’s the widely expected outcome so it probably won’t happen. Meanwhile, we’ve got a cool deep dive for you on a little-known chip maker that is killing it in the electric vehicle industry.
Strategic Insight: Bears won another round as the S&P 500 (SPX) skidded to 4,137, a loss of 2.1%. The weakness brings the total deficit during the past two sessions to 3.4%. It also smashes critical support for the benchmark index at 4,175.
In theory, bears now have a clear path all the way back to the 50-day moving average at 3,970. Normally, I would go all-in with bears. Easy, unimpeded trades are the best trades. However, I’m reluctant to veer too far off into the bear camp. The foundation for the selling since Friday is fear that short-term interest rates are headed much higher as the Federal Reserve fights surging inflation.
That worry seems flimsy. While I do expect the Fed to "talk the talk" about slaying higher prices at their annual lavish Jackson Hole retreat, economic reports this week on weaker New Home Sales, Durable Goods Orders, and the Core PCI price index should assuage investor fears about rates.
It might be difficult for bears to build momentum against that backdrop.
Strategic Trade: We spent all of Monday on the sidelines. I was expecting the S&P 500 to pull back to 4,175. I did not anticipate that bulls would surrender the early August breakout so easily. With a barrage of economic reports coming, I do not see an easy trade at this time. If that changes, I will not hesitate to send an intraday recommendation.
The Backstory: The Dow Jones Industrial Average (DJI) dropped 1.9% to 33,063 and the Nasdaq (IXIC) sank 2.6% to 12,381.
All sectors were in the red, with consumer discretionary and technology the worst performers. Breadth favored decliners seven-one, and there were 276 new lows vs 60 new highs. Leaders were Equinor (EQNR), Humana (HUM), Cheniere Energy (LNG), Agenx SE (ARGX), and ShockWave Medical (SWAV).
The US two-year yield jumped six basis points to 3.33%, and the ten-year yield climbed four basis points to 3.03%, implying the yield curve between the two maturities remains inverted, a bearish signal if sustained. At this level, the market considers bonds a suitable replacement for growth stocks.
West Texas Intermediate futures fell 0.6% to $90.23 a barrel.
Federal Reserve Chair Jerome Powell is set to give a speech on the economic outlook on Friday in Jackson Hole, and investors will be listening for any indication of whether a 50-basis point or a 75-basis point increase is more likely at the central bank’s September meeting.
The probability that the Fed will lift interest rates by 75 basis points to a range of 3% to 3.25% increased to 54% as of Monday, compared with 47% on Friday and 39% a week ago, according to the CME FedWatch tool.
"The Jackson Hole summit will allow policymakers to extend a real-time update on the economy, policy, the future pathway for rates, and risks to the outlook," Stifel chief economist Lindsey Piegza said in a research note. "Like the upcoming inflation report, a more hawkish tone is likely to set the stage for a more aggressive rate move next month, while a softer or more dovish tone will expectedly reinvigorate hopes of a lesser-sized move."
In company news, Netflix (NFLX) shares declined 6.1% after CFRA downgraded the company's stock to sell from hold and lowered the price target to $238 from $245. AMC Entertainment's (AMC) shares plunged 42% as the movie theater chain's new preferred equity units began trading on the New York Stock Exchange, while UK-based rival Cineworld said it may file for bankruptcy in the United States.
