Entering September, a Dangerous Dynamic Is Developing in the Market

Inflation reports on Friday morning were mostly in line and did little to change the likelihood of a Fed interest rate cut on September 18. The market had a slightly positive reaction to the news initially but then stumbled around before a late rally produced some gains. Breadth was good, with over 5,500 gainers to 3,700 decliners, and there were over 650 new highs.

At midday, the action looked quite dreary, but the last Friday in August is typically a very slow time, and there is not much of a rush to deploy capital right now. There isn’t any immediate news flow on the agenda, and it is hard to find a catalyst that will entice investors.

The next big news event is the jobs news next Friday, September 6. This report could have an impact on the size of the cut at the September 18 meeting, especially if it is substantially weaker than expected. Currently, market players appear to be quite sanguine about the economic situation, but a few weeks ago, we had a very negative reaction to news about weak jobs that caused concern. It was quickly forgotten but illustrates how the Goldilocks economic narrative could blow up if there are some surprise numbers.

The other major "event" next week is the start of September, which, on average, is the worst month of the year for the stock market. Seasonality is not a certainty, but it is a tendency and can be self-fulfilling. The combination of the current technical situation with some of the upcoming news flow, such as an interest rate cut, creates a dangerous dynamic.

I’ve been growing increasingly skeptical about the market’s ability to continue to trend higher in the near term, but it is holding up fairly well despite some struggles with individual names. Without any major news flow next week, it should be mixed action.

Have a great long weekend. I’ll see you on Tuesday.

At the time of publication, Rev Shark had no positions in any securities mentioned.