Anticipatory Bears and Seasonality Face Off Against Favorable Technical Conditions
The charts look good, but there are several looming obstacles that could shift the price action.
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A week ago, the indexes plunged when hit with surprise news of significant downside revisions in the employment data. There was concern that the economy was slowing much faster than anticipated, and with the indexes extended, it was a good time to do some selling and reduce exposure.
The negative sentiment did not last long. The indexes recovered most of the losses on Monday as investors focused on the increased likelihood that the Fed would cut interest rates at its next meeting in September and probably follow that with additional cuts later in the year.
The bears grumbled loudly about how the negative fallout of tariffs is sure to hit at any time, but news of increased tariffs was shrugged off once again. There is still little hard evidence that President Trump's economic policy is going to be the disaster that his critics believe.
The indexes have fully recovered all of last Friday's losses and more, but the question now is whether they can move through recent highs and build further strength.
The technical conditions are not bad. The pullback helped to work off some of the overbought conditions, and the number of stocks hitting new 12-month highs dropped significantly. It is a pretty good setup with the lows that were hit last Friday on the employment news serving as important technical support.
The biggest obstacle that the market faces at this juncture is negative seasonality. The last two weeks of August are peak vacation time for Wall Street and one of the slowest times of the year. September is historically the worst month of the year for the market.
Seasonality is not a certainty, but it is a tendency, and it makes it more likely that there will be a negative reaction to news flow. There will be some significant economic reports coming up, and they will all be viewed through the lens of how they will influence the Fed. If inflation picks up and growth slows, then there will be worries about stagflation, which creates a dilemma for the Fed.
One of the biggest positives is that there are so many folks looking for a top to form. With earnings season over and tariffs coming into full effect, there are not a lot of positive catalysts left. The timing for a top seems very logical when seasonality is considered.
Unfortunately for these anticipatory bears, they are trapped when their timing is incorrect and they serve as fuel for more upside. This has been going on for months now. The hopes of a "sell the news" reaction to earnings never occurred, and the market is unconcerned about the highest tariffs in many decades.
My best advice is to focus more on the price action and less on the news flow. Trying to guess the market's reaction to news has been extremely difficult for some time. What works is staying with the positive trend and focusing on stock picking.
At the time of publication, Rev Shark had no positions in any securities mentioned.
