Mid-week market update: This week has been full of major market moving events. The BOJ raised rates and announced it would half its bond buying program. The announcement spiked the JPY and set off a scramble to unwind the carry trade. The Fed kept rates unchanged today, but hinted strongly at a September rate cut. Hamas leader Ismail Haniyeh was assassinated in Iran, which raised the risk of a regional war and rising oil prices. We will also get the BOE decision tomorrow (Thursday). On top of that, investors will see several major megacap technology stocks report this week, starting with Microsoft, which disappointed, followed by META after the close Wednesday, and Amazon and Apple Thursday.
In the face of multiple major news events and sources of volatility, I am sticking to technical analysis to interpret the markets. Sometimes it’s more useful to analyze the market reaction than to try and analyze the event itself. This is one of those times.
Let’s start with the good news. The S&P 500 remains in an uptrend, though it is testing the bottom of a rising channel that began in October 2023.
Mag 7 weakness
The bad news is the weakness in the former leaders, the Magnificent 7. Despite today’s Magnificent 7 strength, the Magnificent 7 is lagging the S&P 500. The accompanying chart shows that while the S&P 500 filled its price gap from July 24, 2024, the Magnificent 7 ETF (MAGS) remains below the gap. By contrast, the small cap S&P 600 has staged an upside breakout.
Analysis from BoA shows that active funds are in a crowded long position in the price momentum factor (read: Magnificent 7), which postulates that market leaders will continue to lead the market.
On the other hand, the momentum factor, however it’s measured, is rolling over.
The pain trade is now a momentum unwind and a carry trade unwind that is likely to force hedge funds to reduce leverage and forecast risk profiles.
Broad market strength
Even though the megacap growth stocks, which comprise a significant weight in the S&P 500, are likely to be a drag on the upward progress of the index, the S&P 500 is enjoying broad market strength. Net 52-week highs-lows are positive, which is supportive of higher prices.
The Advance-Decline Lines are all holding above their upside breakout levels, with the sole exception of the midcap S&P 400.
Market breadth continues to broaden out.
From a fundamental perspective, we are also seeing evidence of strong positive breadth in earnings estimate revisions. Bear markets simply don’t act this way.
It is noteworthy to note that gold has made an all time high. If it maintains the high for a few days it could be the start of a new leg higher. The news out of the middle east and the Feds desire to reduce interest is the best fundamental back drop for gold prices.