As we mentioned last week, the market was sitting at significant resistance/support, and it would not be surprising to see the markets turn down this week. While the declines have been very modest the S&P did turn down and now sits just below the 50-day moving average. With the apparent failure of the resistance/support line, the odds favor a little more weakness over the coming weeks. A rally from here is not out of the question but it is more likely than not, that we fade down over the remainder of this month and perhaps into October. We continue to believe that weakness should be bought so we will be looking to increase our risk a little should the market decline from current levels.
The Nasdaq has much the same chart formation as the S&P with support/resistance failing this week and the index now right at the 50-day moving average. Apple has been weighing on the indices with China’s announcement of its new non-use of Apple products by government employees. We currently hold QQQ in 2 of our 3 portfolios and remain optimistic that technology will remain a leader into year-end. We will look to add to our position on additional weakness.
Our Point
September’s negative reputation has proven true to this point with all of the major indices down for the week. The declines have been modest thus far, but we still have much of the month to get through. With earnings season past, the market will turn most of its attention to economic reports and the perceived effects those reports might have on Fed policy. Next week we will get another round of CPI and PPI reports to get a gauge on where inflation is headed next. The market is expecting inflation to hold steady or see a modest decline. Should we get a surprise higher inflation number, the markets will likely sell off as the expectation of further Fed rate hikes would rise. As it stands now, Fed funds futures indicate there is about a 10% chance of a rate hike at the next Fed meeting (September 20). However, that number jumps to almost 50% when you look to the meeting after next (November 1). The market doesn’t appear like it has priced in the most likely scenario of higher for longer interest rate policy that the Fed has indicated. Instead, the markets seem to believe (in the face of what the Fed is saying) that interest rate cuts are right around the corner. The markets may need to be careful what it wishes for as an early rate cut likely means that the economy has weakened significantly, and the markets have fallen precipitously. Absent the inflation numbers, we are in a market period where bad news is actually good news for the market. Bad economic news will only put pressure on the Fed to lower rates sooner rather than later. As always, it is not easy to decipher all the moving pieces. Our view of the short-term market is measured, murky and leaning negative. However, we believe the intermediate view of the market is considerably more favorable. Longer term (3-6 months) we become much more concerned. We’ll have to see how it all plays out and, as we always say, price is a much more important indicator than anything else. We sold a couple of positions in our bond holdings and purchased one additional one this week. Longer-term bonds have struggled of late with the uncertain rate environment, so we moved into more short-term bond holdings. High yield and longer-term bonds will become a very important driver of market gains over the coming months as interest rates start to fall but it may be a little too early for them now. What a wonderful time of the year – a little bit of cooler weather and lots and lots of College and NFL football. I will spend the weekend in and out doing projects and watching games. Go Titans, Go Vols and enjoy your weekend.
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About Bo Bills
Founder and Chief Investment Officer at Bills Asset Management. With over 30 years of experience in managed risk investing, Bo has helped countless clients achieve their financial goals while preserving capital.
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