Hook, Line and Sinker

Aug 29, 2022

By Pete Biebel, Senior Vice President

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With earnings season largely behind us, and with just a ho-hum week of economic data to feed on, the hook for the market last week was the widely anticipated speech by FOMC Chairman Jerome Powell, which was set for Friday morning at the annual Jackson Hole summit. The prevailing mood in the market lately seems to have been that the Fed would be less aggressive in its interest rate policy, the economy would land softly and the Fed would then pivot and begin reducing its target rate. The stock market has a consistent history of landing substantial gains in the months following the Fed’s final hike in a series. That knowledge apparently lured many traders who thought it was appropriate to do a little bottom fishing in anticipation of such a scenario. With recent signs of declining rates of inflation and a continuing strong jobs market, investors were hoping for hints from Chairman Jerome Powell that the Fed might ease back on its recent pattern of aggressive hikes.

The market averages sank on the opening last Monday, and though they occasionally tried to bob up to the surface, they remained submerged all week. Following Monday’s bad start, the major indices trolled sideways through midweek as traders and investors waited with bated breath for just the right line from the Chairman. The jig was up when Chairman Powell reaffirmed the Committee’s resolve to tackle inflation. His comments Friday morning proved to be the sinker. They sent the market reeling. The market averages immediately dove and continued lower through the afternoon.

On Friday alone, the major averages tanked between 3% and 4%, dragging their net performance for the week to losses of 4% to 5%. The sudden risk-off mood had the biggest impact on growth stocks. The Technology sector fell more than 4% on Friday, losing about 5.5% for the week. The Consumer Discretionary sector lost 3.8% on Friday and 4.7% for the week.

Energy was the only U.S. equity sector to reel in a gain for the week. Crude Oil futures, which had dipped below $88 per barrel on Monday, rallied into the mid-$90s late in the week. That provided buoyancy for energy stocks, lifting the sector to a gain of more than 4% in the week despite losing 1% on Friday in the wake of the tsunami of selling.

The ongoing dilemma for market participants is whether the market low in June was THE low, or instead that the rebound from that low was just a temporary rally in a continuing bear market. Two weeks ago, in my article, “Back in the Addle Again,” I urged anyone who was eager to buy into the rebound rally to hold their horses. I wrote then that the risk of waiting a few weeks for additional evidence and buying higher was much less than the risk of jumping in and being wrong.

If the averages would have rallied over the past two weeks, that would have made the outlook more clear-cut. Additional gains would have pretty much confirmed that a new bull market was underway. Instead, back-to-back weekly losses have muddied the waters. On our research call with our advisors last Wednesday, I specified two price ranges for the S&P 500 Index, SPX, (below the then current level) that could provide some valuable evidence. The first range is 4050 to 4100. I theorized that if SPX could hold in or above that range, then it would be well-positioned to climb back to and above the recent high. The second range is 3925 to 3975. For me, that’s the demarcation zone. That’s the highest range that I could currently identify that, if SPX were to drop below that range, I would believe the index was headed for a lower low. The low close for SPX was in mid-June near 3667.

While SPX began Friday at the 4200 level, it sank into the low-4100s within an hour of the Chairman’s speech. The index initially found support near 4100 late in the morning, but when it dropped below that level early in the afternoon it continued steadily lower for the remainder of the session. SPX closed Friday at its low for the day near 4058.

The fact that SPX fell to very near the bottom of that first range in just two days is more than a little unsettling. Still, if the market can avoid any significant additional damage this week, then the prospects for resuming the rally would still be pretty good. Unfortunately, September is historically the worst month of the year. According to Barron’s, the average return for SPX in the month of September is -1%. By comparison, May and February are the second- and third-worst months; they both have an average return of about -0.15%.

If SPX can just get back above 4100 this week, that could relieve a lot of the anxiety caused by Friday’s plunge. That would certainly be the preferred outcome. However, as I write this on Sunday evening, stock index futures are trading lower. The S&P futures are down by about 30 points and the NASDAQ futures are lower by more than 1%. If that condition holds into the opening on Monday, SPX will fall into the 4020s, well below the bottom of the first range I cited above. If that condition holds, bulls will want to see most if not all of the opening loss recovered by the end of the session.

After declining steadily for two months, volatility in the stock market shot higher last week. We shouldn’t be too surprised to see elevated volatility this month. If nothing else, we’ll get a quadruple witching expiration (a day on which stock and index options and futures expire) in three weeks and the next Fed meeting in the following week. Investors should be aware of the potential for air-pocket declines in the coming weeks. If the averages are destined to make lower lows, then there will likely be a day or two that suffer significant losses with much higher volatility.

This week brings an impressive stringer of economic reports. The biggest lunkers on the list are the employment updates on Thursday and Friday.

Date Report



Monday 8/29/2022 Dallas Fed Manufacturing Survey, August



Tuesday 8/30/2022 Case-Shiller Home Price Index, June, M/M



FHFA House Price Index, June, M/M



Consumer Confidence, August



JOLTS Job Openings, July



Wednesday 8/31/2022 ADP Employment Report, August, M/M


Chicago PMI, August



Thursday 9/1/2022 Initial Jobless Claims



Continuing Claims



Non-Farm Productivity, Q2, SAAR



Unit Labor Costs, Q2, SAAR



PMI Manufacturing Final, August


ISM Manufacturing Index, August



Construction Spending, July, M/M



Friday 9/2/2022 Non-Farm Payrolls, August, M/M



Unemployment Rate, August



Private Payrolls, August, M/M



Motor Vehicle Sales, August, SAAR



Factory Orders, July, M/M




Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Weekly Market Commentary/Market