The major indexes have potential to close lower in September for the first time in eight months based on this week’s Fed statement. The unprecedented bull run of the past sixteen months might still resume in the next couple of weeks, especially as stocks show signs of major inflows. Thus, without a sizable binary negative event, we expect the bull market to resume soon.
The week’s economic releases sent mixed signals, and growth might accelerate again in the coming months into early 2022. The Philly Fed Index, Retail Sales, and the Empire State Manufacturing Index beat expectations. The Consumer Price Index and the core CPI were surprisingly low, and the number of new jobless claims posted its second lowest reading of the pandemic era. Industrial Production was also well below estimates. Finally, the Chinese economy showed unusual weakness in August and banking stress continues to mount as Evergrande is presently facing default, which could pose a risk to global growth toward the end of the year.
Overall, the short-term technical picture eroded this week. The S&P 500 and the Dow are now both below their 50-day moving averages, with only the Nasdaq holding up above its short-term support level, but the benchmarks are still well clear of their 200-day moving averages. Small-caps had another volatile week with the Russell 2000 trying to stay above its 50-day moving average, but due to the index’s persistent relative weakness, it is now getting dangerously close to its 200-day moving average as well. The Volatility Index (VIX) was seen attacking the widely-watched 20 level throughout the week, and that the fear gauge hardly exceeded that key level is a positive sign for bulls. Short interest continued to creep higher this week, and the most-shorted issues again lagged the broader market as many investors reduced their riskier bets in momentum and story stocks.
Next week will see many key economic releases. The NAHB Housing Market Index will be released on Monday, Building Permits and Housing Starts will be released on Tuesday, and Existing Home Sales are scheduled for Wednesday. The Markit manufacturing and services PMI’s will highlight Thursday’s session while the week will end with New Home Sales on Friday. The most important piece of data this week will be released on Wednesday as the Fed is expected to unveil a schedule of tapering its quantitative easing (QE) program, and while Chairman Jerome Powell has done everything to prepare the market for this much anticipated announcement, investors will likely still be in for heavy volatility.