Why bulls ‘have reason to worry’ ahead of Jackson Hole: Morning Brief

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Wednesday, August 24, 2022

Today’s newsletter is from Jared Blikre, a market-focused reporter at Yahoo Finance. Follow him on Twitter @SPYJared.

The S&P 500 (^GSPC) has a big problem.

summer The rally in equities lost momentum last week after the S&P 500 surged 17.4% from mid-June lows to mid-August highs.

But echoing a common complaint in the so-called FAANG era that prevailed in the years before the pandemic, 30% of the heavy lifting was again done by just a few stocks – Apple (AAPL), Microsoft (MSFT), Amazon (AMZN) and Tesla (TSLA).

And as these exchanges falter and culprits like the strengthening dollar once again make their presence known, this recent the rally looks more troubled than a few weak sessions might otherwise indicate.

Apple, arguably the most important flagship stock on Earth, suffered its worst two-day drop in two months on Friday and Monday after hitting key trendline resistance. This drop saw the stock break a distinct – and steep – downward trend line; the stock is now on its 20-day moving average.

Over the summer, Apple soared to less than 4% of its all-time high – an impressive rebound for a stock that fell around 30% from late March to mid-June. This quick reversal, however, put Apple stocks on shaky ground.

Apple (AAPL) failed long-term trendline resistance, broke potential steep trendline support and is now sitting on its 20-day moving average.

Over a similar period, Microsoft posted a 21% rally that brought the stock within 16% of its all-time high. But five days later, the headline confirms a island inversion pattern on its daily candlesticks. Amazon is in a similar boat, but is still “on the island” – consolidating what had been a 45% gain at its recent peak.

Meanwhile, Elon Musk’s Tesla looks a bit stronger after a 50% rally that wasn’t as steep and unsustainable as Apple’s. Still, the stock has struggled to break through halfway through its decline from record highs, indicating that the shorts still have the edge on a longer-term timeframe. Only above $1,000 per share would we expect the Tesla bears to start throwing in the towel.

None of this, of course, would be too much of a concern had the wider market been more involved in the rise.

Admittedly, some internal market metrics have recently given bullish signals. The percentage of S&P 500 constituents trading above their 50-day moving averages, for example, topped 90% last week for the first time in more than a year.

But major industry leaders and groups – such as the high-yield bond market and the semiconductor industry – underperformed during the summer rally and quickly reversed course. Short hedging rallies can only take a market so far.

Meanwhile, optimistic investors are on pins and needles, counting the minutes of Federal Reserve Chairman Jay Powell’s keynote address in Jackson Hole on Friday morning.

But most strategists think investors can overlook a Powell pivot so early in the Fed’s rate hike cycle. The Fed chief explicitly told his presser in late July several times that the Fed’s next steps were all about incoming data — read: inflation statistics — and not much else.

More troubling for the market, US stocks have accounted for 86% of global equity gains during the recent rally, according to Michael Hartnett’s team at BofA Securities. Moving away from the US stock market, it’s no coincidence that the recent rally in risk has blossomed as the dollar has cooled after its meteoric rise.

And that respite does indeed seem transitory, however, as a 7-session rally in the US Dollar Index (DX-Y.NYB) erased a 20-session decline of equal magnitude, bringing the dollar back near highs of two decades.

Today, the euro is back below parity with the dollar, a boon for tourists but a scourge for Europe, now facing recession and leading the global economy to follow suit, say some specialists.

Unless Powell says something that knocks the dollar off its high pedestal, don’t expect much help from the Fed.

Investors looking for the next bullish catalyst can applaud any hint of Powell near the end of the Fed’s balance sheet reduction program — or so-called quantitative tightening — which is putting pressure on currencies, bonds and money markets.

But as Bank of America Global Research’s equity derivatives team said in a note on Tuesday: “We believe risky assets have reason to be concerned for Jackson Hole.”

Leaving investors better served, like never before, simply by not fight the Fed.

What to watch today

Economic Calendar

  • MBA Mortgage Applications

  • Durable Goods OrdersJuly (+0.8% expected, +2% previously)

  • Durable goods orders excluding transportJuly (+0.2% expected; +0.4% previously)

  • Door-to-door sales pendingJuly (-2% expected, -8.6% previously)

Earnings

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