Mid-week market update: I was a little hesitant about jumping to instant conclusions about the upside breakout of several market indices in reaction to Chair Powell’s speech on Friday, and I wanted to wait for signs of confirmation. We have it now. The Dow and the equal-weighted S&P 500 staged upside breakouts, and they are holding above their respective breakout levels, which are constructive signs.
The absolute and relative breakouts of the small-cap Russell 2000 are holding too.
Waiting for NVIDIA
And now the market holds its breath waiting for the NVIDIA earnings report due after the closing bell today. The WSJ reported that, based on data from Option Research & Technology Services, option traders expect a swing of 6.2% in NVIDIA stock after its report today. Traders are bullish on the stock. In recent days, some of the most actively traded NVIDIA options contracts were call options pegged to the stock jumping to $190 and $200, according to CBOE Global Markets data. As the stock is now the biggest weight in the S&P 500, its results will be a bellwether for the semiconductor group, AI stocks, the NASDAQ 100, and the S&P 500.
I have no idea of what the NVIDIA results will be and my guess is nothing more than a coin flip. However, the broad breadth leadership shown by other stocks is a constructive bullish sign.
Potholes in September
My former Merrill colleague Fred Meissner wrote this morning that stocks usually rally into Labour Day weekend. But September is almost upon us and it has a reputation as being seasonally negative for stock prices and seasonally positive for volatility.
Here are some possible potholes that await traders in September. First, both stock and bond implied volatility have calmed, which drops them into the “Assertive Trump zone”. Trump has exhibited a pattern of being unpredictable and he is most unpredictable when markets are calm. While trade tensions are still elevated and we are less likely to see him use tariffs to assert his authority, he recently flexed his political muscles in the Lisa Cook Affair, and the FBI raided former national security advisor John Bolton’s home in search of classified documents. While the markets were not significantly rattled by either incident and did little to push implied volatility higher as a guardrail to unpredictable behaviour, these circumstances encourage Trump to take more steps to assert his authority. Trump has demanded RICO racketeering charges against George Soros and his son Alex. The U.S. has deployed three guided-missile destroyers to Venezuela’s coast, which is far more than what’s needed for drug interdiction. What’s next?
Investors will be closely watching the PCE report due Friday morning, as PCE is the Fed’s preferred inflation metric. PCE inflation is expected to edge up for July, which moves it away from the Fed’s 2% target. Even if the report comes in in line with expectations, how long before Trump dismisses it as “fake news” and vow to install a BLS commissioner “who sees the economy as it actually is”?
Next up is the August Payroll Report due the following Friday. The market narrative changed dramatically after the last report showed sharp downward revisions to employment. However, initial jobless claims have been unusually weak in the past few weeks (red lines, inverted scale), but nonfarm payroll (blue line) could see an unexpected jump when the August report is released. A strong August jobs report could put the odds of a September rate cut in doubt.
I remain intermediate-term bullish on equities, but the S&P 500 is now trading at a forward P/E of 23, and some short-term caution may be warranted.