Bears whaled on the bulls again, then evaporated as buyers emerged, notes Jon Markman, editor of Strategic Advantage.

Most of the trade on Thursday seemed like the prelude to another ugly end-of-day decline. Then the benchmark S&P 500 (SPX) reversed and finished 0.3% higher at 3,966. The rally was unexpected, and a welcomed reprieve for bulls. They have been backpedaling all week on hawkish commentary from a steady parade of regional Federal Reserve presidents.

Some of the late rally Thursday was undeniably short covering by bears ahead of Friday’s August nonfarm payroll report. Some worry that weak economic data can reverse the current bearish trend. Given the ongoing Fed commentary, I’m skeptical.

A poor employment report will not make a difference. There is overhead resistance for the S&P 500 at 4017, the 50-day moving average. I expect bears to reload short positions there.

Minor support is at 3,920, and bulls will argue the decline early Thursday was a successful test of that level. 

The Trade

We are long the ProShares Ultra Short S&P 500 (SDS) from $44.29. The SDS closed at $45.11, down 0.53%. Target is $51.90 lmt gtc; stop is $41.45 stp.

The Backstory

The Dow Jones Industrial Average (DJI) was up 0.5% at 31,656.42 while the Nasdaq (IXIC) was 0.3% lower at 11,785.13.

Energy, materials, and technology were the only decliners, while health and utilities led the gainers.

Breadth favored decliners three-one, and there were 741 new lows vs 34 new highs. The leaders were Cardinal Health (CAH), Turquoise Hill Resources (TRQ), ChemoCentryz (CCXI), Prometheus Biosciences (RXDX), and Altimmune (ALT). Dogs and cats; this is not leadership.

The US Treasury two-year yield jumped 6.4 basis points to 3.51%, its highest level since 2007, and the ten-year rate surged 12.7 basis points to 3.259%. The yield curve between the two maturities remains inverted, a bearish signal.

Initial jobless claims fell by 5,000 to 232,000 during the week ended August 27; estimates were for 246,000. DA Davidson said the latest print reflected the lowest level since June 25. August's super-important nonfarm payroll report has just been released.

"Recall, in July following a stronger-than-expected jobs report, yields spiked and investors redirected their expectations from 50 basis points to a 75 basis points hike up near 70% directly following the release," Stifel said in a research note. "Currently, expectations are leaning to a 75 basis point hike at 74%."

The Institute for Supply Management's US manufacturing index held steady at 52.8 in August from July, compared with expectations for a decline to 51.9. S&P Global's manufacturing PMI fell to 51.5 in August—the lowest reading since July 2020—from 52.2 the month before.

West Texas Intermediate futures declined 3.7% to $86.25 a barrel as China put about 21 million people in Chengdu into a lockdown as part of its Covid-19 control measures.

In company news, Nvidia (NVDA) said the US government imposed a new license requirement for future exports to China and Russia of the company's A100 and H100 integrated circuits. Shares slumped 7.7%, the worst performer on the S&P 500, but there was a lot of late buying.

Shares of Okta (OKTA) plunged nearly 34%, the worst performer on the Nasdaq 100, following the company's fiscal second-quarter results, while the top performer on the index was Moderna (MRNA), up 5.1% after saying Thursday that Health Canada has approved the use of its Spikevax omicron-targeting bivalent Covid-19 booster vaccine for individuals aged 18 years and older.

Data Junkie Update

Off-the-wall but somewhat interesting comment about late summer seasonality in markets from elite technical analyst Tom McClellan: “The Covid-induced 'work from home' (WFH) movement has made some permanent changes to how Americans work. So the normal seasonal uptick in September when traders get back from August vacations may not necessarily be a thing going forward. This assumes that the volatility is a function of traders’ presence in the office.

“I am partial to the explanation some traders offer that the basis for annual seasonality in the stock market has to do with the amount of daylight. In September, we get the 'equinox', which is when the amount of daytime and nighttime are equal. But this also means that September is when the rate of change in the amount of daylight is at its greatest, which affects our moods. It is an interesting theory, one that I would not know how to design a randomized test to prove.”

And now for a comment on the dreadful IPO market from “The IPO market has become the worst of all time. Over the past 12 weeks, the dollar value of IPOs larger than $25 million has dropped to the lowest since at least 1985, exceeding even October 2008. This is typical behavior in the discouragement phase of a typical sentiment cycle. The performance of the IPO market is not a precise timing mechanism by any stretch. As we saw last year, it's more of a broad indicator of the market environment and where we may be in the typical sentiment cycle."

“Investment bankers will feed investors whatever they're pining for, and right now it is not young companies looking for capital. That suggests we're in the discouragement phase of the cycle. That can last a while and is often accompanied by wide swings that don't take us much of anywhere. The bright side is that it also usually means that even if stocks decline in the weeks and months ahead, it probably wouldn't be too much lower lows.”

Learn more about Jon Markman here...