Will Stock Market Pivot To Higher Levels?

In this article:

• Market structure holds for how long?
• Watching FAANG stocks, Apple price
• ‘Fear’ index, news events send signals

This week started off with a positive before a technology leader tainted the news cycle and the stock market reacted by giving up early gains.

NVIDIA (NVDA) sent a shock wave through the indexes by warning of a shortfall in revenue losses weeks ahead of the second quarter earnings report scheduled for Aug. 24 after close. (NVDA closed down 6.30% at $177.93 on Monday)

The Nasdaq was up by almost 2% in mid-morning trading before the NVIDIA news reversed price action into the afternoon. The markets closed near flat across the board.

This type of wild action is why Simper’s traders are watching key news events and announcements to work through market volatility.

Pullback Hiccup Or Will Market Pivot Higher?

Is this market stuck in bear territory, or was the pullback to flat on Monday just a hiccup as the market pivots toward higher levels?

One statistic to consider is that in the last five-out-of-five times the market has been down 7.5% in a month and then up 7.5% the next month, this indicates a key long-term bottom. This appears to be the market scenario setting up now. Combine this with a rising belief that inflation is peaking which would allow the Fed to be less aggressive on tightening, and the market appears primed to march higher into September.

Overall market structure has changed little over the last few sessions. Last week the indexes managed bullish, higher weekly closes. Some progress was made under the surface to improve weaker parts of the market. Stocks and the indexes as a whole maintained ground gained thanks to leading favorites such as “FAANG” stocks.

FAANG refers to technology companies that include Facebook (now Meta), Amazon, Apple, Netflix, and Google (now Alphabet). FAANG stocks which now hold more valuation than most other stocks combined. 

These are highly-recognizable companies among consumers and traders. Traders have turned to these tickers for profit opportunities for years. For more than a decade before the pandemic in 2020, FAANG stocks were in a bull run that cemented the technology sector as the foundation of an unprecedented bull run in market history. 

FAANG assets have struggled this year, and the weakened sector has suffered along with the overall market.

The current market environment continues to surprise traders with unexpected twists. For months “good” news has been heralded by the market as “bad” news. Good news has often led to a downturn (this sentiment negatively affected FAANG stocks and others after first quarter earnings reports).

Yet, the gap down on Friday after stellar jobs numbers was recovered quickly and fueled a bullish undertone. Few expected the jobs number to come in double expectations, and traders could have easily bet that the Nasdaq would be down 3% and the S&P down 2% based on past reactions. Both indexes closed basically flat on the day, giving support to bullish sentiment.

A messy part of the current market environment is that the U.S. dollar and Treasury bonds may be positioned for breaks that would bear market movement.

The economic events  calendar is light this week except for the inflation statistics set for release. The U.S. Consumer Price Index (CPI) announcement is set for Wednesday and the U.S. Producer Price Index (PPI) is on Thursday.

The CPI measures consumer costs for important staples such as housing, gasoline, utilities, and food. PPI tracks the change in wholesale cost – the price of goods sold by manufacturers.

If these inflation numbers come in weaker than expected the market could rally.

There are also numbers from the United Kingdom gross domestic product (GDP) and University of Michigan Consumer Sentiment Index on Friday.

Simpler’s traders are watching major resistance levels on a variety of internal market signals all at once. Traders are watching market momentum and structure for moves in the indexes closer to the 21-day moving average as opposed to the extended 3x average true range.

Price action could move higher, but the caution is to be wary of a bear market that could move higher and then roll over quickly. There is much to consider, i.e. market internal signals, historical bottoming statistics, and the potential reaction from the market if the Fed pivots away from aggressive tightening.

Remember the rule of thumb that in bear market rallies tend to take the “stairs up and the window down.”

Next interest rate hike odds jump

After the release Friday of the July employment numbers, the probability of another 0.75% interest rate hike in September jumped to 80% from 35% the prior day.

Non-farm payrolls came in with 528,000 new jobs vs. the 250,000 expected, and the unemployment rate was 3.5% vs. 3.6% expected.

In addition to these numbers, yields also traded higher with the 10-year Treasury bond getting closer to the 3% level which has been a threshold where growth stocks begin to suffer.

The near-term uptrend in the markets appears to be holding and it’s worth noting the continued uncertainty of the Chicago Board Of Exchange (CBOE) Volatility Index (VIX). The VIX closed at 21.40 on Monday, up 1.18%.

The VIX – considered the “fear” index – anticipates market volatility over the next 30 days. A level above 20 is considered high volatility – more fear in the market. 

Add the increase in breadth of the markets and these markers could be constructive prospects for bullish traders.

It is worth repeating that traders should consider maintaining a level of discernment for a variety of market signals.

Simpler’s traders have noted recent gains in growth areas such as technology (XLK) and discretionary (XLY) sectors, yet utilities (XLU) and consumer staples (XLP) sectors are standing out as the only sectors holding above each of their moving averages without upside resistance.

Utility stocks could be of particular interest as several larger firms have invested heavily in alternative sources of energy. These stocks may benefit following passage of the congressional “inflation bill” that will infuse billions more dollars into the economy, particularly for energy.

The technology sector (particularly semiconductor stocks) is also outperforming while healthcare – normally a stalwart sector – continues to struggle.

Following Apple daily for signals

Mega-cap technology stock Apple, Inc. (AAPL) has long been an interest among Simpler’s traders.

High inflation, holding at a 40-year high, affects Apple and other technology stocks. 

Simpler’s traders have held that if Apple falls the market could be headed for trouble. Here’s action in Apple which closed today at: $164.87 (down .29%). Apple grew from a pandemic low of $57.21 in March 2020, but is down from $182.01 since Jan. 1. Apple is a high-value stock within the Dow, Nasdaq, and S&P 500.

Apple gained strength after a strong second quarter earnings report beating revenue and profit expectations. This in the face of prior analyst downgrades and a softer market for its high-end products.

Simpler’s traders noted that AAPL started this week in a confirmed uptrend while finding support at its five-day moving average. The weekly chart has shown positive signals for AAPL.

Market leans positive… for now

Market leans positive… for now

As the broader markets appear to broaden out with more stocks breaking back above key resistance, the market is holding potential for traders.
Interest rate hikes, high inflation, and recession fears are still lingering so economic news events this week may test the market leaning into a potential uptrend.