Sentiment is likely to keep deteriorating over the next 2 months as the Delta variant peaks into late September. We forecasted the peak for energy in late June and expect it to bottom with the stock market in late September. The major indexes are now entering a precarious time when more significant declines can be seen. We expect a selling wave in August and another in September. Key uptrend lines will have to be broken to make this a more serious intermediate correction near term. We will be watching technical levels into the end of this week.
Earnings season is already behind us, and while most stocks failed to join the rally, just enough mega-tech names advanced to grind indexes higher. Besides the pandemic, the Fed’s possible “taper” announcement could be the most important risk factor in the coming weeks.
As for the economy, inflation was the main topic of the week, and judging by the week’s mixed and confusing releases, prices could remain the center of attention for months. The Consumer Price Index (CPI) and the core CPI suggested that price pressures might be easing. However, producer prices smashed expectations across the board amidst the continued supply chain issues. The job openings estimate surged above 10 million, hitting a new all-time high, but the weekly number of new jobless claims remains stubbornly high. The Small Business Index also missed expectations due to the severe labor shortage.
The S&P 500, the Dow, and the Nasdaq are still all above their rising 50-day moving averages, and the indexes are also way above their rising 200-day moving averages. Small-caps continue to be weak, and the Russell 2000 closed yet another week below its flat 50-day moving average. The Volatility Index (VIX) finally turned lower and hit a six-week low this week, but it is still stuck above its COVID low. The percentage of stocks above their 200-day moving average dropped slightly, confirming its negative divergence and closing the week near the 60% level.
With the earnings season having finished and this week’s critical inflation indicators behind us, technical factors and COVID-related headlines will likely influence trading next week. Key economic releases for next week will consist of the following: The retail sales report and industrial production will be out on Tuesday. Building permits, housing starts, and the FOMC meeting minutes will be released during Wednesday’s session, and the Philly Fed Index will be released on Thursday. Treasury yields and the dollar will remain in focus as well ahead of the Fed’s Jackson Hole symposium.
We will be giving Gold Members an important cryptocurrency update about what to expect into year end in tonight’s premium briefing. Due to the additional coverage, the report may arrive later than normal.