September has been quite a ride for investors so far. After a nosedive of 4% at the beginning of the month, the S&P 500 has largely clawed its way back.
Inflation continues to fall, with August CPI and PPI data released last week showing that inflation is trending close to 40-year averages. While Core CPI came in hotter than expected, Fundstrat Head of Research Tom Lee interpreted the data as “better than it looks.” It “doesn’t change the fact that inflation is indeed falling fast,” he added. Aside from the statistically lagging shelter component, the biggest contributors to August Core CPI were travel-related – airline fares and (non-shelter) lodging. “Did inflation suddenly accelerate in Shelter and airline fares?” Lee asked rhetorically. “We don’t think so. To us, this looks more like seasonal-adjustment noise.”
There appears to be consensus agreement that the inflation numbers will not cause the Fed to push back the rate cuts that officials have recently hinted will begin at next Wednesday’s Federal Open Markets Committee (FOMC) meeting. Lee expects that this means tailwinds for stocks. Yet, “we just saw the fourth-worst start for September,” Lee reminded us. He and his team found that when looking at the historical “first four trading days” of September and examining the 20 worst instances for stocks, not once in those 20 precedents has September ended up positive. “Sure, history is meant to be broken,” he conceded, “but in my view, this is telling us that we are in for a challenging time leading up to Election Day.“
Head of Technical Strategy Mark Newton acknowledged that “the stock market has been a lot choppier since July, but outside of Technology, it has mostly held up extraordinarily well. And with regard to Technology, despite this huge sell off, it really has not broken levels to think that Tech is going to weaken from here. In fact, Tech has been an outperformer all week.”
“It’s really important for trend followers that the S&P 500 gets up above the 5,650 level,” he asserted. “That will allow for a pretty decent rally, in my view, but for now, we’re still sort of choppy and range bound, held by 5400 on the downside and 5650 on the upside.”
Chart of the Week
If the Fed does indeed cut rates at the FOMC on Wednesday, as widely expected, the bearishly inclined are warning that this could actually be bad for stocks. They note (correctly) that historically, stocks have fallen half the time immediately after the Fed makes its first cut of a cycle. However, Head of Data Science “Tireless” Ken Xuan and his team took a deeper look historical cycles and came to a different conclusion. Examining the last 11 Fed “first cuts,” Xuan found that five of them took place with a recessionary backdrop. The other six came during a non-recessionary, “no landing” scenario such as the one in which we currently find ourselves. The difference in historic post-cut win ratios between the two categories is significant and best illustrated by our Chart of the Week.
In the last three days, we’ve seen not just a return to Growth, but Small caps have also begun to outperform again. IWM 0.37% is up just shy of 4% in the last three trading sessions, or approximately around 1% a day. This is bullish price action and prices have pushed above initial resistance on today’s gap and are set to test 217.50-218. Investors need to watch the upper end of this triangle closely, as when exceeded, this can allow for the true acceleration that can allow the technicals to start to improve dramatically and help unlock some of the cheap fundamentals right now.
Interestingly, BTC 0.20% has fully recovered from the post-debate dip, while both Fannie Mae (FNMA) and GEO Group (GEO 4.30% ) – both considered Trump trades – have yet to rebound. This suggests that the overnight move in crypto was more likely driven by a broader risk-off environment, rather than being a reaction to the debate outcome. Something to keep in mind as we approach November.
AMZN -0.52% recovery is impressive and the stock is now set to close above the prior peak from August when it successfully filled the gap from 8/1. this is a bullish reversal and will be a bullish technical close above 181 that should allow AMZN to continue higher into next week’s FOMC meeting. Key level to keep an eye on is 199.60 which would allow this most recent rally from 8/28 to equal the initial one from 8/5 in price points gained. Additionally, this would represent an area near prior peaks from July which are likely to represent strong resistance on gains. Overall, AMZN remains on UPTICKS and this is eventually expected to break back out to new all-time highs. At present, today’s progress is a welcome development.
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