The bulls are gaining back control of the tape

Posted by Cam Hui - August 14, 2024

Mid-week market update: I wrote on the weekend that investors should watch for signs of an O’Neill follow through day for bullish confirmation of the rebound.

A follow through day can occur as soon as day 4 (last Friday) of a rally. It’s defined as the index rising 1% or more on higher volume than the previous day. The most powerful follow through days occur between day 4 and day 7 of the rebound.

We got the follow through day on day 6 yesterday when the S&P 500 rose 1.6% on higher volume. This is an indication that the bulls are seizing control of the tape. Even as the S&P 500 tests overhead resistance at the 50 dma, the follow through day raises the odds that the market will break up.

In addition, Helene Meisler ran a poll on the weekend. While she found that most respondents were bullish, there was a slight plurality of opinion that the market would weaken and possibly re-test the old lows. The follow through day, which is a sign of strong price momentum reversal, significantly reduces that risk.

Technical recovery

I am seeing other signs of technical recovery. Breadth is coming back. NYSE new highs-lows is positive, NASDAQ new highs-lows is negative but turning up.

Risk appetite indicators are also turning up after a sudden fright.

Repricing risk

Even though the backdrop is equity bullish, here are a key reason for some choppiness ahead.

Yesterday’s softer than expected PPI report sparked a strong risk-on response by the markets. Today’s benign CPI report cements the odds of a September rate cut. Now that we have both CPI and PPI, we have a fairly good idea of what PCE will look like. The Cleveland Fed’s nowcast for July core PCE now stands at 0.13%. These readings gives the Fed cover to pivot to risk control mode and turn to the “balance of risks” as a reason to cut rates.

While a September rate cut is fully expected, the market is pricing in a near coin flip as to whether the cut will be a quarter-point or half-point. At a minimum, it’s expecting a half-point cut some time this year.

There are hawks on the FOMC who are resisting the notion of a September cut at all, and the expectations of a half-point cut is probably overly ambitious. As Powell herds the Committee members towards a rate cut, watch for Fed speakers to take a half-point off the table. The Jackson Hole meeting could well be the catalyst for such a re-pricing.

My inner trader remains long small caps. The usual disclaimers apply to my trading positions.

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.

Disclaimer: Long TNA

1 thought on “The bulls are gaining back control of the tape”

Ravindra says:

August 14, 2024 at 4:13 pm

Is the yen carry trade risk mitigated? Japan will be reporting its GDP soon and may cause volatility!

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