Category: Newsletter

This past week, markets surged to all-time highs as a plethora of bad economic data and a weaker-than-expected inflation print lifted hopes of Fed rate cuts in the coming months.

This past week, the market broke above the 50-DMA with a solid confirmation of the MACD "buy signal." Currently, the market is decently overbought after the advance, so a pullback to retest the 50-DMA would be welcome. Such a pullback would turn the 50-DMA from previous resistance into support and reduce some overbought conditions.

On Wednesday, Jerome Powell's speech following the conclusion of the latest FOMC meeting provided a more "dovish" than expected message. While Powell did note that progress on inflation has been lackluster, the announcement of the reversal of "Quantitative Tightening" (QT) excited the bulls.

The market took a hit this week once again as the summer weakness continued. While many attributed the decline in stocks and rise in bond yields to the recent Fed projections of "higher for longer," the action this week seemed more akin to end-of-the-quarter rebalancing for fund managers. Furthermore, September 30th marked the fiscal year-end for about 20% of fund managers who needed to make distributions and redemptions. Nonetheless, the market declined this week, with only minor support holding the market in place.

As shown, the market did break below the previous low on Friday after failing to reclaim that previous support at the 20-DMA. The failure to reclaim that support turns the previous 20-DMA into resistance and makes the 50-DMA new critical support over the next few days.

As we previously noted, just because the market breaks the 20-DMA does not mean we must take immediate action. What we need to see is a confirmation of that break with either a failed retest of previous support or a further decline. On Friday, the stronger-than-expected employment report sent stocks higher as "good news is good news" as more robust economic growth should support earnings. However, "bad news also remains good news," as it would mean Fed rate cuts.

With March behind us, the market has posted 5-consecutive months of gains. While not entirely uncommon, some interesting data points surround such win streaks from the chart below.

Last week, we suggested we could see a further correction this week, given some of the weaknesses that had been accruing. Such was the case until Wednesday's FOMC meeting announcement. While the meeting was largely as expected, with no real change to outlook, the outcome was seen as primarily "dovish" as Powell reaffirmed the Fed was still on track to cut rates three times this year.

After a rally to all-time highs, the market again traded lower on Thursday and Friday to finish at the 20-DMA. However, some differences this week suggest we may see a further correction next week.