For a second consecutive session, bears got hawkish commentary from the Federal Reserve, and still stocks rallied, notes Jon Markman, editor of Strategic Advantage.
The S&P 500 (SPX) closed at 4,006, a gain of 0.70%.
The advance puts the benchmark index less than 0.5% below the 50-day moving average at 4,025. That level is key overhead resistance and bears should reload there.
On the other side of the ledger, since Tuesday, bulls have had a good run. Financial stocks have been extremely strong, while there have been good snapback rallies in beaten-down tech names.
Now bulls need to take back the 50-day moving average. I doubt they will be successful. There is a world of difference between short-covering rallies and broad-based, bullish advances.
At this stage, bulls simply do not have enough strong sectors to push beyond 4,025. I’m still looking for the S&P 500 to fill the gap down at 3,790. That level represents critical support.
The Trade: We are long the ProShares Ultra Short S&P 500 (SDS) from $44.29. The SDS closed at $44.19, down 1.3%…sell all at target $51.90 lmt gtc; set stop at $43.05 stp (effective after 11 am ET only). Even if the market is up Friday we suspect bears will regain the upper hand next week.
I am heading out of town for a week of vacation, but expect to continue publishing as usual. However the letter may be shorter than usual and there could be one or two days that we don’t publish without notice. Thanks for your patience.
The Backstory: The Dow Jones Industrial Average (DJI) rose 0.6% to 31,774.52, the Nasdaq (IXIC) climbed 0.6% to 11,862.13 and the S&P 500 was up 0.7% to 4,006.18.
Healthcare and financials were the biggest gainers, while communication services led the decliners.
Breadth favored decliners 5-3, and there were 263 new lows vs. 50 new highs. The leaders were ICICI Bank (IBN), Progressive Corporation (PGR), Sempra (SRE), Republic Services (RSG), and Enphase (ENPH).
US two-year Treasurys jumped 5.9 basis points to 3.506%, and the 10-year rate rose by 2.7 basis points to 3.292%.
In a virtual discussion at a Cato Institute conference, Fed Chair Jerome Powell said that the longer inflation remains above target, the more likely that higher inflation expectations become incorporated into economic decision-making. He said the Fed remains "strongly committed" to fighting inflation and will "keep at it until the job is done," while also warning that "history cautions strongly against prematurely loosening policy."
The US central bank, which has raised benchmark borrowing costs four times this year, is due to announce its next policy decision Sept. 21, with markets widely expecting another increase of 75 basis point increase. The probability of that reached 86% as of Thursday afternoon, compared with 77% a day ago, and 75% a week ago, according to the CME FedWatch Tool. The remaining 14% probability is for a 50-basis-point increase.
Initial jobless claims fell by 6,000 to 222,000 for the week ended Sept. 3, compared with the consensus on Econoday for 240,000. The previous week's level was revised down by 4,000 to 228,000.
The move is the fourth consecutive decline in claims and the seventh straight undershoot against consensus, "which tells us just how strongly many forecasters believed that the spike in early July marked the start of a sustained increase," Pantheon Macroeconomics chief economist Ian Shepherdson said in a note. "Nothing in these data suggests the economy is softening further, still less that it is in recession."
West Texas Intermediate futures jumped 1.1% to $82.81 a barrel.
In company news, Regeneron Pharmaceuticals (REGN) said two pivotal trials investigating aflibercept 8 milligrams in patients with diabetic macular edema and wet age-related macular degeneration met their primary endpoints. Shares soared nearly 19%, the most on the S&P 500 and the Nasdaq 100.
