WHAT IS MOVING THE MARKETS? 10 Headwinds That Remain in Place

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In response to the recent steep pullback in stocks from their August highs, last week our Market Outlook focused on how uncertain and potentially volatile September (and October) can be to the stock market. You can review its charts and analysis here.

What prompted this week's rally?

There are various drivers of the positive action.

1. Oil prices have been falling quite steeply (see chart below). This will help take pressure off the escalating inflation picture.
   After hitting a highof $120 a barrel in June, oil prices have declined by about 30% to the low $80's. Some of this is due to seasonality, demand destruction (people are not driving as much), and a global slowdown (especially in Europe) which has caused additional supplies to come online.

   

   As you can see in the chart above, the price of oil is now below both the 50 and 200-day moving averages. In fact, the 50 crossed below the 200 on Friday, which is viewed as a negative indication for future oil prices.

   Oil's trend is bearish, but this has helped relieve some inflationary pressure which in turn is a net positive for the stock market.

2. Many commodities have declined in price (see a chart of DBC below). DBC is an ETF that tracks a basket of commodities, including oil and gas, softs (i.e., corn, soybeans, wheat, and sugar), gold, silver, and industrial metals (i.e., copper, aluminum, and zinc).
   Materials such as copper and lumbar have fallen due to the sharp decline in housing construction.

   

3. Interest rates have had a volatile summer. 10-year Treasury bond rates peaked in mid-June, then pulled back substantially (which spurred the June to early August stock rally).
   After Fed Chairman Powell's infamous breakfast remarks at Jackson Hole in late July, the 10-year interest rate rose quickly again (see chart below).

   During the last three days of the week, bond prices consolidated, which benefitted the stock market.

   

4. An oversold stock market which was due for a bounce. Many of the sentiment readings were extremely negative, and the momentum indicators (RSI) were also deeply oversold. As a result, it was not surprising to get a significant bounce after 3 negative weeks.
5. Transportation, small-caps, and retail stocks, all important members of Mish's Modern Economic Family, have held up above their all-important 50-day moving averages. This has signaled a potential bounce coming (see Mish's instructional video about these three areas here)

Use the links below to see more of Mish's recent analysis via multiple media outlets.

Click to watch recent media appearances covering topics such as: "If Things Can't Get Much Worse, Is That Bullish?", "Meme Stocks and How to Think About Them", "Transportation Sector is a Reliable Lead Indicator", "Recession or Stagflation" and more.

Click to watch Mish's in-depth conversation with Real Vision's Maggie Lake on the topic of: "What's Driving The Rebound In Risk Assets?"

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What conclusions can we derive from all of this? NONE, ZERO, ZILCH!!!

Headwinds Remain

(the dog above is similar to Keith/Mish's dog as well as my own)

We remain in a bear market (or at least not a NEW bull market).

As we also shared with you in last week's Market Outlook, we remain in a difficult market period of the year (September-October).

What are the other headwinds that potentially lie ahead?

1. The upcoming midterm elections. Anticipation of one party or another having control of Congress may derail the markets. This midterm cycle has typically signaled a difficult period before November. Given the divisive nature that exists today, this could be exacerbated this year by the aggressive jawboning that takes place.
2. Upcoming Fed meeting later this month. It is widely expected that the Fed will raise rates 75 bps (third month in a row for this steep of a raise). However, if they only raise 50 bps (not likely), it may signal to the markets that the economy is decelerating much faster than expected.
3. Hawkish Fed Speak. Several Fed Governors have been actively commenting about the need to keep tightening. Most have said interest rates must continue going higher to stop inflation. This is likely to continue leading up to their next meeting in late September. This will continue to have an influence on market activity, good and bad.
4. Negative macro-economic numbers Upcoming CPI (Consumer Price Index), ISM, Consumer Sentiment readings, indications of 3^rd quarter GDP, jobs numbers including unemployment claims, and a host of other indications of the strength or lack thereof of the economy.
5. Recent large flows of money out of the stock market. Some funds, like ARKK (Ark Technology Fund) have seen record number of outflows during the month of August.
6. Geopolitical surprises and inflation. Oil and natural gas are just a few of the pawns being used as countries try to control other countries. Meanwhile, soft commodities are still strong and could be in a longer-term Supercycle. Gold, silver, and industrial metals are also poised to rally from their near 100-year lows relative to equities
7. Chinese aggressive action. US-China relations are not positive right now. This could impact our reliance on goods and services from the Far East.
8. Dollar strength. This has already curtailed large multinational companies' earnings growth. This alone should drive earnings down and negatively affect the markets.
9. Downward revised earnings expectations. Analysts have been cutting their corporate earnings expectations due to a combination of higher fixed and variable costs (materials and labor), a slowdown in consumption, and dollar strength which lowers export expectations. Problems in Europe are also having somewhat of a contagion effect.
10. Potential housing slowdown. While not yet a "crash," housing activity is down significantly. This is due to higher interest rates and bubble-like housing prices in many markets, making housing increasingly unaffordable. If this area of the economy picks up speed, it will have a detrimental effect on consumer spending and, ultimately, investing in the stock market.

 

Here are additional points of relevance from the Big View:

Risk-On

• All 4 key US Indices closed at or above their 50-day moving averages, transitioning into a Recovery phase while not becoming overbought according to either price action or momentum according to the Real Motion indicator. (+)
• IWM is the strongest Real Motion pattern amongst the major indices because the 50-DMA has crossed back above the 200-DMA, looking likely to also be the first index to retest resistance at its longer-term 200-DMA on price after leading the most recent rally. (+)
• Every sector was green on the week, being led by Consumer Discretionary (XLY) +4.8% while Consumer Staples (XLP) +0.6% performed the weakest, a risk-on indication. (+)
• Market Internals for both the S&P 500 and Nasdaq Composite drastically improved this week, with the McClellan Oscillator bouncing from deeply oversold territory and now back to almost neutral levels. (+)
• Market Internals as measured by the number of 52-week highs / lows turned positive from oversold levels for both the S&P 500 and the Nasdaq Composite, a historical indication for short-term bottoms. (+)
• According to the number of stocks within the S&P 500 and Russell 2000 that are above key moving averages, SPY is mildly overbought in the short-term but is still leading over IWM in regards to its longer-term recovery, with the number of stocks above the 50-day moving average now above 50% for SPY. (+)
• 5 of the 6 members of Mish's Modern Family regained their 50-day moving averages (excluding Semiconductors-SMH), with IBB even regaining its 200-DMA and leading the group. (+)

Risk-Off

• The Yield Curve remains inverted, still a recessionary indication. (-)
• Soft Commodities (DBA) held up well above their 50-day moving average and is still outperforming the S&P 500 on a short-term basis, with Copper (COPX) also breaking out above its 50-DMA and outperforming, clear signs of lingering inflationary pressures. (-)
• Despite the runup over the past 3 days, volume failed to confirm the move and is still showing more distribution than accumulation days over the past 2 weeks. (-)
• Commodities were the clear hotspot this week led by Gold Miners (GDX) +8.6%, Palladium (PALL) +8.2%, Metals & Mining (XME) +7%, and Oil Services (OIH) +6.9%. (-)
• Treasury Bonds (TLT) made another new low with pressure on interest rates across the board especially following the influence of the European Central Bank's 0.75 bp hike on Thursday. (-)

Neutral

• Risk Gauges improved from negative back to neutral territory this week. (=)
• The short vs. long-term volatility ratio (VIX/VXV) improved from a negative to a neutral reading. (=)
• Both Value (VTV) and Growth (VUG) improved above their respective 50-day moving averages this week with VTV already making strides towards testing its 200-DMA, however, Triple Play shows a potential rollover in this relationship that could result in Growth leading. (=)
• Foreign Equities are underperforming US Equities across the board. (=)
• Gold (GLD) looks to be potentially putting in a double-bottom on both price and momentum according to Real Motion and is now back above the 10-day moving average for the first time since early August. GLD also looks to be bouncing off its significant 200-week moving average and from the bottom of an 18-month range. (=)
• Although the US Dollar made a new high this week, it looks to be overbought and is losing momentum over a longer-term basis according to Real Motion. (=)