Dow Jones Industrials 33,706.74 -0.16%, S&P 500 4,228.48 -1.21%
Nasdaq Composite 12,705.22 -2.62%, US Ten Year 2.977
Is our one-month stock market rally over? On what was it based? Do the underlying economic and financial fundamentals justify higher stock prices? Before addressing those questions, let us look at stock market price action from the chart below:
In an article published in Investing.com author Fawad Razaqzada provides technical analysis of the Standard & Poor’s 500 recent price action.
- Stock prices from the end of year highs to the recent June lows show that both the 200-day moving average and the 61.8% Fibonacci retracement have nearly converged at the 4310 to 4350 range. It is common for the markets to have such a retracement at the 61.8 and 78.6 Fibonacci levels after peaks and bottoms.
- There is a downward sloping trend line (green) at the top of the recent market rally, and that is where the index appears to have met resistance. That is a bearish signal.
- During the rally the benchmark also found resistance at the 200-day moving average, which is also downward sloping. This too is a bearish indicator.
This price action is characteristic of bear market rallies, including all those that we have seen since the market sell-off that began at year-end.
Meanwhile the macro backdrop remains negative and not supportive of higher stock prices. Despite the hullabaloo of July’s consumer inflation at a “mere” 8.5% coming in below June’s 9.1%, it is still remarkably high. The modest drop in the rise of inflation fueled hopes that the Federal Reserve may slow down its reduction of its balance sheet and make smaller increases in the Fed Funds rate. With its target inflation rate of 2% that seems implausible.
If we are not already in one, the likelihood of a recession remains strong with the prospect of continuing inflation requiring higher interest rates, and it will depend on the rate at which the central bank removes accommodative monetary conditions. That is an unknown. We DO know that we have an inverted yield curve. Presently a two-year treasury note yields approximately 3.3%, while a ten-year note yields only 2.9%. That indicates that investors are expecting higher short-term rates from the Fed and are also anticipating a slowing economy with lower corporate earnings. In the chart below we see how the inverted yield curve led to recessions (white bars) in 1980, 1982, 1991, 2001 and 2008.
So stay defensive with a good amount of cash and cash equivalents, take advantage of the higher yields that shorter-term, liquid treasury securities provide, and maintain a core portfolio of defensive, dividend-paying stocks in the health care, utility and consumer staples industries.
Have a Great Week
All information herein has been prepared solely for information purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.
The view and opinions expressed in this message and any attachments are the author’s own and may not reflect the views and opinions of M&R Capital Management, Inc.