With market sentiment at neutral, this week’s inflation data could set the market direction for the rest of the month. Outside of the inflation data though, there’s not a lot of news to move the markets this week. So I would expect Monday and Tuesday to be fairly flat or down slightly over fears of where August inflation data might come in. Then Wednesday through Friday I would expect the market to move based upon how the inflation data comes in.
Keep in mind that higher than expected inflation could cause the markets to drop over fears of the Federal Reserve raising interest rates higher, while lower than expected inflation could cause the markets to rise over hopes that the Federal Reserve won’t raise interest rates again.
Last Week Recap
Last week saw the markets fall initially, most likely due to investors selling in expectations of a sell-off in September. But then the markets rose on Thursday and Friday after some Fed members said they though the Federal Reserve policy was at a good place, and failed to indicate the need for more aggressive rate hikes. I mentioned in last week’s newsletter that I wasn’t convinced that the bullishness would last, and sure enough the S&P and NASDAQ both finished the week down 1.3%. It was a classic example of herd mentality as investors ignored the short term bullish technicals, and instead sold over fear of how September historically performs.
Market Sentiment
Market sentiment (https://www.cnn.com/markets/fear-and-greed) returned to the neutral stage as expected. Excluding the bond market data, the only stock market indicator that is still greedy is Market Momentum. All other indicators are either in the Fear or Neutral stages. If the bond market data hadn’t been included, market sentiment would be in the fear stage. That means investors are now bearish. If the bearishness can continue for another week or two, the S&P should fall below the 125 day moving average, which would put market momentum in the fear stage as well, eliminating all bullishness from the market.
The volatility index (VIX) rose slightly last week, although it still remains deep in bullish territory. It had risen as high as 15.69 on Thursday, but ultimately finished the week at only 13.84. Part of the reason the VIX didn’t rise more was due to the bullish close on Friday which led many options traders to fear a rise in the markets on Monday. As a result, options traders sold their S&P put options, which caused the VIX to drop back down below 14. So the VIX is still bullish. But you should be aware that the the put/call ratio is below 1.00 meaning more people are buying put options than call options. So long as that trend continues, the VIX should rise.
Technical Analysis
After last week’s mild drop, the market gave up it’s bullishness and returned to neutral on the daily charts. The DOW, S&P, and Russell all closed below their 21 day moving averages, while the NASDAQ closed below the 10 day moving average. The MACD and RSI are also near neutral on all 4 indices, with the NASDAQ being slightly more bullish than the rest, and the Russell being slightly more bearish than the rest. In summary, the daily chart technicals are neutral, giving no clear direction or indication of how the market will move this week.
The weekly technicals are just as neutral as the daily technicals. But while the daily candles lean mildly bearish, the weekly candles lean mildly bullish. The DOW, S&P, and NASDAQ all finished above the 10 week EMAS, with the Russel the only major index closing last week below the 21 day EMA. On all 4 major indices, the MACD and RSI are completely neutral.
Economic News
As the Federal Reserve enters its blackout period prior to their meeting next week, we won’t have any Fed speakers this week. But we do have some major economic news. On Tuesday the Consumer Price Index (CPI) inflation data is being released, and on Wednesday the Producer Price Index (PPI) inflation data is being released. These numbers will be especially important, as they are the last major economic data the Federal Reserve will get before their meeting next week.
Unfortunately inflation is expected to have risen over the prior month. Month-to-month CPI is expected to have increased 0.6% vs 0.2% the month prior – mainly due to rising oil prices. Headline CPI is expected to have risen to 3.6% from 3.2% the month prior. If there’s any good news, it’s that Core CPI, which is what the Federal Reserve really looks at, is expected to have dropped year-over-year to 4.3% from 4.7% the month prior.
PPI is expected to take a similar path, although with a slightly lower increase than CPI saw. Unfortunately we don’t have a lot of expectations reported for PPI, so we’ll just have to wait and see how the data comes out. PPI usually leads to CPI numbers a few months later, since when the cost to produce goods increases, those increases are passed on to consumers in the months ahead.
Looking forward to next week, CME futures are pricing in a 93% chance of no interest rate hike at the Fed’s meeting next week, although the Fed is expected to raise rates again at their November 1 meeting. You can view the current CME futures predictions here: https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html.
Here’s the full list of all of the economic news coming out this week as well as the time each report is being released: https://www.marketwatch.com/economy-politics/calendar
Here’s what time each Fed member is speaking this week: https://www.federalreserve.gov/newsevents/calendar.htm
Earnings
With earnings season over, there aren’t a lot of companies reporting this week. The most interesting companies reporting are Fuelcell Energy and Oracle on Monday, and Adobe on Thursday.
Other Things to Know
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Stock Curry