(Bloomberg) — Stocks struggled to make headway, following a furious rally that put the market within a striking distance of its all-time highs.
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A drop in equities interrupted what would have been the S&P 500’s longest winning streak in 20 years. In a stark contrast to the “extreme negative momentum” during the panic selling of early August, stocks had recently made a dramatic round-trip — adding almost 8% in just eight days. Following upbeat macroeconomic data last week, Citigroup Inc. strategists said nearly $16 billion in new long bets have been added to S&P 500 futures — driving positioning back to increasingly extended levels.
“The momentum guys are driving the bus,” said Kenny Polcari at SlateStone Wealth. “Now the volumes have been trending lower as we move into the end of the month. Moves will be and are exaggerated as a result. And I think the recent rally is proof of that exaggeration.”
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At Miller Tabak, Matt Maley said it would be “healthy” if the equity market took a breather for a day or two.
“No market moves in a straight line,” he noted.
The S&P 500 fell below 5,600. Nvidia Corp. — which had rallied almost 25% in six days — led losses in megacaps. Bank of America Corp. slumped after Warren Buffett’s Berkshire Hathaway Inc. sold more shares. Lowe’s Cos. cut its full-year guidance. Netflix Inc. hit a record high. Palo Alto Networks Inc. climbed on a bullish outlook and after boosting its buyback program.
Treasury 10-year yields declined six basis points to 3.82%. The loonie trailed most of its major peers as inflation in Canada decelerated, cementing rate-cut wagers. Oil steadied, with traders monitoring developments in cease-fire talks for the war in Gaza.
Dan Wantrobski at Janney Montgomery Scott, says that he continues to anticipate ongoing stock-market strength on a near-term basis, but he remains on “high alert” for another, potentially bigger corrective wave moving through the August-October time frame.
“So what happens when everything and everyone is teed up to be bullish,” Wantrobski said. “From a timing perspective, we are headed into a window where there may be high probability for a liquidity event to occur — and the charts, trader positioning, and sentiment are all very vulnerable right now in our view. We smell a ‘bull trap’ ahead. But hope we’re wrong.”
After the S&P 500 last closed at overbought levels on July 23, it quickly sold off and moved into “extreme” oversold territory in just 13 calendar days, according to Bespoke Investment Group. Just as fast as the S&P 500 moved into extreme oversold territory, though, it swung back to overbought levels nearly as fast.
“The market may usually take the stairs up and the elevator down, but in this case, it took the elevator both ways!” the Bespoke strategists said.
Since World War II, there have only been 10 other periods when the S&P 500 moved from oversold levels down to extreme overbought levels and back to overbought levels in less than five weeks.
While the S&P 500’s consistency of positive returns was slightly better than normal, the magnitude of the returns relative to historical averages was mixed, Bespoke noted. Median one-, three-, and six-month returns were modestly better than the long-term average, but the median one-year gain was well below the post-WWII average.
“While stocks have experienced breathtaking moves in the last month, we would caution against trying to read too much (good or bad) into the swiftness of the rebound,” the strategists concluded.
Momentum traders and a surge in corporate buybacks promise to drive a US stocks rally over the next four weeks, Goldman Sachs Group Inc.’s Scott Rubner said in a note dates Monday.
Rubner, who correctly predicted a late summer correction and advised in late June to trim exposure in US stocks after July 4, has turned tactically bullish saying current positioning and flows “will act as a tailwind as sellers are out of ammo.”
Goldman Sachs’ trading desk said last week that CTAs, or so-called trend followers, are “no longer a headwind.” In fact, the funds are expected to be buyers of equity this week, no matter how markets move. As benchmarks remain above key technical levels, more buying should be on the cards. Meanwhile, Barclays strategists also noted that equity exposure of risk control funds fell from 110% to about 50%.
“If incoming data remains well behaved allowing volatility to ease and the Fed embarks on the cutting cycle next month, there is room for systematic exposure to stabilize and turn around,” they say.
“Strong price momentum and sharp rapid reversals as witnessed over the past month are a feature of modern financial markets, not a bug,” said Jason Draho at UBS Global Wealth Management. “This stems from the outsized market influence of the Fed, macroeconomic uncertainty, investor herd behavior, and the growing use of index-linked products to manage positioning.”
A technical indicator used to identify market momentum — the NYSE Zweig (Breadth Thrust) — continued to signal ongoing strength, according to Jay Kaeppel at SentimenTrader.
He says a true “Zweig Breadth Thrust” occurs when it moves from below 40% (indicating an oversold market) to above 61.5% (indicating an overbought market) within any 10-day period. The chart below displays every date the indicator crossed above 60%, including all overlapping signals. The most recent signal occurred on Monday.
Aside from flows, the recent rally was also fueled by bets the Federal Reserve will signal it’s getting closer to cutting rates. Just days ahead of Jerome Powell’s speech in Jackson Hole, key US payrolls revisions is poised to capture Wall Street’s attention.
Goldman Sachs Group Inc. and Wells Fargo & Co. economists expect the government’s preliminary benchmark revisions on Wednesday to show payrolls growth in the year through March was at least 600,000 weaker than currently estimated. While JPMorgan Chase & Co. forecasters see a decline of about 360,000, Goldman indicates it could be as large as a million.
“Our guess as to what is driving rates lower today/over the last week is the hyper focus on the payroll revisions,” said Dennis DeBusschere, founder of 22V Research. “People seem to be assuming a large downward revision would increase the odds of more aggressive rate cuts signal at Jackson Hole. That seems fair. Also, it doesn’t mean recession odds go up.”
To Anthony Saglimbene at Ameriprise, continued progress on inflation, moderating but still healthy labor conditions, and economic updates that point to firm consumer trends likely allow the Fed to comfortably begin cutting its policy rate in September.
From a monetary policy perspective, whether it’s a 25 or 50-basis point cut next month isn’t really that important, he noted. What is important — and not lost on investors over the last week or so — is that updates on labor, services activity, inflation, and the consumer all point to a still healthy economic environment, but one that allows the Fed room to start easing monetary policy.
“This is how a soft landing starts, in our view. Of course, there is no guarantee the Fed will ultimately pull it off, but you need the conditions in place to start, and it looks like we finally have those conditions in place today, he said.
Corporate Highlights:
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Johnson & Johnson will pay as much $1.7 billion for V-Wave Ltd., bolstering its development efforts to treat heart failure as it goes deeper into medical technology.
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Kroger Co. is tapping the US investment-grade market on Tuesday to help fund its acquisition of fellow grocer Albertsons Cos. in what could be one of the biggest corporate bond deals of the year.
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Patients taking Eli Lilly & Co.’s blockbuster weight-loss shot were 94% less likely to develop diabetes in a three-year study that illuminates the long-term health benefits of treating obesity.
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Alaska Air Group Inc. and Hawaiian Holdings Inc. are one step closer to finalizing their $1.9 billion merger after the US Justice Department decided against challenging it.
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Boeing Co. has paused flight tests of its 777X jetliner while it inspects the four-aircraft fleet for cracking in a crucial structural component that connects the hulking General Electric Co. engines to the plane’s wings.
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Edgar Bronfman Jr. has formally submitted a $4.3 billion bid to take control of Paramount Global and quash an existing offer from Skydance Media, according to a person familiar with the proposal.
Key events this week:
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US Fed minutes, BLS preliminary annual payrolls revision, Wednesday
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Eurozone HCOB PMI, consumer confidence, Thursday
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ECB publishes account of July rate decision, Thursday
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US initial jobless claims, existing home sales, S&P Global PMI, Thursday
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Japan CPI, Friday
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Bank of Japan Governor Kazuo Ueda to attend special session at Japan’s parliament to discuss July 31 rate hike, Friday
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US new home sales, Friday
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Fed Chair Jerome Powell speaks at Jackson Hole symposium in Wyoming, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 fell 0.2% as of 2:06 p.m. New York time
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The Nasdaq 100 fell 0.2%
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The Dow Jones Industrial Average fell 0.1%
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The MSCI World Index was little changed
Currencies
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The Bloomberg Dollar Spot Index fell 0.1%
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The euro rose 0.3% to $1.1118
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The British pound rose 0.2% to $1.3022
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The Japanese yen rose 0.7% to 145.53 per dollar
Cryptocurrencies
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Bitcoin rose 0.2% to $59,241.32
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Ether fell 0.9% to $2,594.12
Bonds
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The yield on 10-year Treasuries declined five basis points to 3.83%
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Germany’s 10-year yield declined three basis points to 2.22%
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Britain’s 10-year yield was little changed at 3.92%
Commodities
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West Texas Intermediate crude fell 0.4% to $74.06 a barrel
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Spot gold rose 0.3% to $2,511.77 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Isabelle Lee and Vildana Hajric.
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