Bears Gain the Upper Hand, but Fed Rate Cut Pressure Gives Bulls Hope
After a change in character of the price action last week, it is now extremely important to watch for this one thing in the market.
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Following the surprisingly large revisions to employment data on Friday, investors are now considering the positive aspects of that data. The biggest positive is that it puts extreme pressure on the Fed to cut interest rates at its next meeting on September 17. Early on Monday morning, Fed Fund futures show an 87.4% chance of a quarter-point cut.
Another positive aspect of the surprise job numbers is that a change will be made at the Bureau of Labor Statistics. The employment data has become increasingly unreliable since the economic changes created by the Covid crisis. Even worse, there has been very little transparency into the problems which has led to shocks like that which occurred on Friday.
President Trump views this as a political issue, but others in the Administration, such as White House Economic Advisor Kevin Hassett, view this as a problem with outdated models and a lack of communication. Trump is expected to appoint a new leader this week, as well as a replacement for the Fed governor who resigned last week.
There will be plenty of tariff news later this week as the latest round of tariff deals goes into effect. Although there isn't much economic data due, plenty of earnings reports are coming up, including from names such as UBER, Disney DIS, and McDonald's MCD.
The big issue for investors is technical. There was a change in the character of the price action last week, with a series of intraday reversals to the downside and then a gap-down open on Friday after the employment news. There is some bounce on Monday morning, but it would not be surprising to see some investors use strength to reposition as we head into the dog days of summer and a seasonally weak period.
At this juncture, it is extremely important to watch for failed bounces. Downtrends are largely a product of failed bounces that result in lower lows. As market conditions deteriorate, dip buyers lose confidence and will be quick to sell into strength.
The market needs some corrective action, but it will take time for new support levels to develop. The likelihood of a Fed rate cut may help to build a support level, but it is important to give the market time to sort out the various issues that came to the forefront last week.
We have a positive open, but don't be too trusting.
At the time of publication, Rev Shark had no positions in any securities mentioned.
