Momentum Is Slowing as Investors Await Key Political and Economic News
I’m not bearish, but here's why I expect limited upside in the near term.
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After shrugging off major downside revisions to employment data on August 1, the indexes have been in a steady uptrend, with the Russell 2000 IWM exhibiting good relative strength. Technically, the indexes have been chugging along very nicely and squeezing the skeptics and economic bears.
The question now is whether the market can build on recent momentum as it contends with the Ukraine-Russia issue and a Jerome Powell speech at Jackson Hole on Friday.
This is peak vacation week on Wall Street, and negative seasonality is an issue, but so far, it hasn’t had much influence. The market has handled some hotter-than-expected inflation data quite well, and there continues to be a high level of speculative interest in secondary stocks.
There was some stalling action on Friday, but the bears have been unable to gain a foothold, dip buyers are lurking, and economic concerns have been ignored.
The Jackson Hole conference has a history of significant Fed policy news, but that is unlikely to be the case this time. Powell keeps emphasizing that the Fed is "data dependent" and there are several important economic reports before the next meeting on September 17.
Fed Fund futures indicate an 84.8% chance of a quarter-point cut at the next Fed meeting. That is a drop from 90% and it can shift very fast if there is some surprise inflation news. For now, the hopes of a rate cut are giving this market support. Corporate earnings have also been generally good, although the bears would argue that valuations are stretched, especially for big-cap technology names.
Market conditions are generally good, but momentum is slowing, and there are some potential news events that could produce negative responses.
My game plan is to keep stops tight and to do my best to avoid giving back recent gains. It has been a good run, and many stocks need a reset before we can be more aggressive with additional buying. I’m not bearish, but I’m not expecting significant upside in the near term.
At the time of publication, Rev Shark had no positions in any securities mentioned.
