A DV Market Updates MERC

10 Minutes Weekly Picture: Jackson Hole Meeting This Week Could Shake Up Markets, Further Selloff in Bitcoin Imminent , Trading Ideas: $A, $MERC, $DV (22nd August 2022 – 26th August 2022)

Jeff Sun

A four-week winning streak for the market came to an end as it pull back from its short-term overbought posture, along with other news catalysts in the mix. For the week, the Russell 2000 was down -2.9%, the Nasdaq Composite was down -2.6%, the S&P 500 was down -1.2%, and the Dow Jones Industrial Average was down just -0.2%.

It will be a busy week in the US with Fed Chair Jerome Powell’s speech at the Jackson Hole symposium taking central stage as investors will be looking for insights on the future path of interest rates. There will also be several data releases including personal income and spending, flash PMIs (August) and the second Q2 GDP estimate.

Here’s what you need to know to start your week.

 

1. Jackson Hole

Investors will be eagerly awaiting Jay Powell’s speech in Jackson Hole, Wyoming on Friday for possible answers about how high U.S. interest rates may go and how long they will need to stay at elevated levels to bring inflation back under control.

The Fed has hiked interest rates by 225 basis points since March in a bid to battle inflation which is running at the highest in four decades.

Fed policymakers have reiterated that there is still a way to go in their inflation fight, pushing back on expectations of a peak in inflation and a so-called dovish pivot, one narrative that has helped boost stocks.

Last week’s Fed minutes showed that while the size of the September rate hike is still in play policymakers felt there was little evidence so far that inflation pressures are subsiding.

Powell is likely to remind investors that with one more inflation report and another employment report still to come before the September meeting officials still have time to decide how large that rate hike should be.

 

2. Stock Market Correction

U.S. stocks have rallied since the start of the second half boosted by stronger-than-expected corporate earnings and hopes the economy can avoid a recession even as the Fed hikes rates to curb inflation.

Markets have gained despite warnings from Fed policymakers that expectations of a peak in inflation and a so-called dovish pivot from the central bank may be premature.

But there are signs the rally may be starting to slow after Wall Street’s three major indexes all ended last week lower. The S&P 500 fell about 1.2% and the Nasdaq slid 2.6%, both snapping a four-week streak of gains. The Dow lost about 0.2% for the week.

There was a heavy economic drag throughout the week that served as a reminder that the market might have gotten ahead of itself with its rebound enthusiasm. In the same vein, a 10-yr note yield pushing 3.00% was a testament to underlying inflation angst and a renewed headwind for many growth stocks that had logged big gains off the June lows.

 

Key Economic Calendar (Weekly)

The spotlight will be taken by personal income, spending and consumption expenditures inflation (Core PCE Price Index) as well as flash PMI releases for August. Also, investors will be closely watching the second estimate of Q2 GDP along with Fed Chair Jerome Powell’s speech at the Jackson Hole symposium

All times listed are EDT

Tuesday

9:45: US – Flash Services PMI m/m: forecast to increase from 47.3 to 50

Thursday

Day 1: US – Jackson Hole Symposium

8:30: US – Prelim GDP q/q: forecast of improvement to -0.8% from -0.9%

Friday

Day 2: US – Jackson Hole Symposium 

8.30: US – Core PCE Price Index m/m: forecast to decline to 0.3% from 0.6%

10.00: US – Fed Chair Powell Speaks

 

Top 3 Leading and Lagging Sectors (Weekly)

For the week, eight of the 11 S&P 500 sectors finished lower with losses ranging from -1.4% (industrials) to 3.8% (communication services). The winning standouts were consumer staples (+1.3%), utilities (+0.8%), and energy (+0.1%).

 

Market Breath (Weekly)

% of Stocks Above 50 DMA = 73.53% (-9.91%)

% of Stocks Above 200 DMA = 36.68% (-10.88%)

 

Market Technicals – (S&P 500, NASDAQ, Bitcoin, Bonds & Credit Spread, NAAIM)

$SPX (S&P 500) vs $RSP (S&P 500 Equal Weight) – (Net High/Low -23)

$SPX snap its four successive weekly advances with a decline of -1.21% during the week. The decline is deemed to be a technical pullback as it became the appropriate stopping point to take some money off the table following a spirited run that saw the S&P 500 gain 18.9% between its low on June 17 and that Tuesday high. Additionally, $SPX ran into a confluence of resistance highlighted last week;

  • its declining 200MA,
  • trend channel resistance,
  • major support turned resistance all within 4,300 – 4,350 range, and
  • extension in % of stocks above 20MA and 50MA at their extreme levels

The support to watch for this week remains at 4,200 level, the immediate resistance turned support level which also slices through its current declining all time high VWAP level, and its 10-day moving average.

 

$QQQ (Nasdaq 100) vs $QQQE (Nasdaq 100 Equal Weight) – Playing Out Bearish Rising Wedge

Tech and growth names have been hard hit since the start of 2022 by a rapid rise in Treasury yields on the back of expectations that the Fed will hike interest rates aggressively to combat high inflation as higher rates can hurt their companies with high valuations based on the prospect of future profits.

$QQQ remains as the weakest major index year to date with -18.8% return, but the gap in the year to date correction between the major indices has been tightening since the beginning of July 2022. $QQQ posted a weekly loss of -2.28%, breaking down from its month long bearish rising wedge pattern that was highlighted last week. With the 10-yr note yield pushing towards 3.00% again, this is a renewed headwind for many growth stocks that had logged big gains off the June lows.

The support level to watch for $QQQ this week remains at $315, an immediate resistance turned support level that would also slice through the existing rising 10/20-day moving averages.

 

$BTCUSD (Bitcoin / USD) – Bitcoin Breaking Down From Its Second Bearish Flag

Bitcoin ($BTCUSD -11.57%) is in midst of a breakdown from the highlighted second successive bearish flag formation, slicing through the existing flatten 10/20-day moving averages.

The level of support to watch for $BTCUSD this week is at $20,700, a level that will see a an accelerated sell off similar to 9/5/22 (-11.59%) and 13/6/22 (-15.55%).

 

$PCCE (Put/Call Ratio Equity) & $VIX (Volatility S&P 500) – Persistence in Reflection of Imminent Major Sell Off Ahead

VIX >30 is assumed to accompany large volatility, resulting from increased uncertainty, risk, and investor fear. VIX <20 generally correspond to stable, stress-free periods in the market. Higher VIX levels equates to more expensive options premium and vice versa for lower VIX level. 

The spike level to watch for $PCCE in the last 24 months period is at 1.00. The current reading of 0.898 (+18.42%) remains elevated and poses likelihood and risk of accelerated selling for the month of August.

Previously, the VIX volatility index, also known as Wall Street’s fear gaugel has declined for eight consecutive weeks, the longest streak in the last three years. For the week, it creeped up to 20.59 (+5.48%).

The weekly build up in momentum of both $PCCE and $VIX is reflecting a major sell off remains imminent for the equities market ahead.

 

$VIX/VXV – Reading at 0.88 (Tranquility)

The VIX/VXV measures the ratio between 1-month implied volatility and 3-month implied volatility, which is helpful as it filters out higher baseline readings on VIX.

  • If it is greater than one, it implies uncertainty, negative for equities. On the contrary, such high reading (i.e. spikes) coincide with market bottoms.
  • If it is less than one, it implies tranquility, favorable for equities.
  • If it is below 0.82, the returns for S&P500 are often less than stellar. 

 

$IEI/$HYG (Credit Spread) – $TNX (10YR Treasury Yield) – Treasury Market Not In Agreement With Stock Market Rally

Market participants are keeping a close watch on credit spreads as one of the better economic signals. Junk bond issuers are perceived to be bigger credit risks, so if economic growth slows or contracts, there will be increased angst that these issuers won’t be able to make good on their interest payments. Hence, a widening high-yield spread is regarded as a leading indicator of difficult economic times which, in turn, often invites a more challenging period for the stock market since difficult economic times translate into weaker earnings prospects.

Credit Spread edged up to 1.55% (+0.03) after five successive weeks of contraction, since setting a high of 1.62% at the end of June.

U.S. Treasuries ended the week on a lower note, lifting yields on the 10-yr: (+14 bps to 2.99%) and longer tenors to their highest levels in at least four weeks.

 

NAAIM Exposure Index 64.44 (-9.99%)

The NAAIM Exposure Index represents the average exposure to US Equity markets reported by members of the National Association of Active Investment Managers. It provides insight into the actual adjustments active risk managers have made to client accounts over the past two weeks. The blue line depicts a two-week moving average of the NAAIM managers’ responses. 

This week’s NAAIM Exposure Index number is: 64.44

 

Top Trading Ideas for the Week