Traders are now at the midpoint of Q3, a point on the calendar where markets would typically downshift to just above idle as we enter the true “dog days” of summer.
Stock market volumes may reflect this more than price action market suspense, as we are 4 weeks from the highly anticipated September FOMC meeting. Debate is in full throttle among talking heads, self proclaimed pundits, and actual FED junkie economists, as to whether an initial rate hike A) is warranted, and B) will actually happen at the September meeting.
While my view is “Yes” on both, it feels like the market is at slightly better than 50/50.
Stock Market Recap
Monday was by any measure a very encouraging day for the Bulls. Significant early losses were erased within an hour of the opening and as we grinded through the European close at 11:30 AM it became clear that there was a strong underlying bid to the market on every slight pause or pullback. If your game plan was to be long, you got a gift at this time.
By the end of the day, Major Stock Market averages had gained +0.5% to +1.0% and internals were constructive with advancing issues beating decliners by 3 to 2 on both NYSE and NASDAQ.
Even more encouraging was that the market easily shrugged off further declines in Oil, as the commodity again traded at a 6½ year low, and the Eurozone economy giving us a stingy +0.3% 2Q GDP report.
The S&P 500, +0.5% at 2102.44 held its both its 200 day MA, and its closing price levels from the tight consolidation of the last 4 days to post its second best close of the month.
NASDAQ, +0.85% at 5091.70 regained its 50 day MA and will again test the 5100 to 5150 resistance level that has given it so much trouble numerous times in the last few months.
The Russell 2000, +1.0% at 1225.09 again is right at its 200 day MA where it failed badly a week ago. The Russell has been the clear underperformer in Q3, but with “green candles” 3 of the last 4 days, and a successful test of the 1200 level during the middle of last week, the Russell should give us a good read on the markets internal health the remainder of the month.
With Q2 earnings now largely in the rear view mirror (HD and WMT did report early this morning, the opposite ends of the spectrum in the retail earnings food chain), and the September FOMC meeting in 4 weeks, macro data will get the markets full attention.
Wednesday we’ll get CPI data in the morning and the minutes from the early August FOMC meeting at 2:00 PM. No doubt the FOMC Minutes will get a thorough parsing for hints toward the likelihood of an initial rate hike at the mid September meeting. While the CPI will also get a “good look”, the July PCE numbers a week ago are more heavily favored by the FED as the barometer best suited for measuring their +2% inflation target
The +0.6% for July PCE, in addition to upward revisions from the prior 2 months will make it hard to deny that the FOMC is justified in making an initial rate hike in September, regardless of turmoil in China and tepid growth in any in the Eurozone.
The Early Line: It will be a great test to see is US equities can “shrug off” early weakness from global headlines as easily as they did yesterday. Eurozone markets are moderately lower at midday and US equity futures are looking at early declines of maybe -0.5%. This morning’s weakness seems to be a byproduct of 5%+ losses overnight in the Chinese stock market.
In China, the Shanghai Composite Index sold off 6.2% bringing it less than 300 points from the July 8 lows.
The smaller cap Shenzhen index fell 6.5%. Slightly more than 50% of the stocks listed on both indices hit their daily “limit down” of 10%. While reports are that there was surprise and concern among local market participants that Chinese Finance Authorities did not intervene late in the trading session to stem the selling, I actually view it as a positive development that stocks were allowed to trade freely, albeit within their daily limit without government intervention.
China financial markets will never be able to regain the confidence of global investors until it can wean itself off the government as a central player in the market.
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