Fears of Sluggish Growth, Sleepy September Seasonality Pose Threats to Market
But volatility could be a wise trader's friend as Magic 7 is no longer only shelter in town.
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After a volatile week, stocks are mixed early on Monday morning. Bulls are hopeful that the big market swings have shaken out some excesses and will provide support for better action, but some formidable obstacles are ahead.
The first issue that investors must confront is news on the economy. Attitudes have shifted since the July jobs report, and now the primary economic concern is slowing growth rather than inflation. The market was nearly in panic over whether the Fed took too long to cut rates, but that fear subsided. It is almost certain that rate cuts are coming, but slowing growth is causing some anxiety that could be exacerbated by slowing growth.
The consumer price index, producer price index, retail sales, weekly unemployment, and housing starts will be reported this week. All have the potential to cause a reaction on the market. But they will all have to be considered together to arrive at a better idea of how much economic slowing is really taking place. Debate is ongoing over whether the last jobs report really was that bad, so investors are going to carefully consider every new piece of data.
With the earnings season mostly over, there isn’t much other news flow. Japan's central bank and Nikkei swings shook things up last week, and economic weakening is continuing to be a concern in China, but hostilities in the Middle East are likely the main overseas issue in play at this point.
The biggest problem the market faces is a combination of broken technical support and poor seasonality. It is very well known that we are entering the historically weakest time of the year. September is, on average, the worst month of the year.
Technical conditions broke down in the past couple of weeks as the Magnificent Seven names faltered and the rotation into smaller stocks fizzled out. There has been some rebound in big-cap technology in the last couple of days, but it is going to take a mighty effort for them to regain the momentum they had earlier this year.
One bright spot is that there is more focus on individual stock picking. Since investors can’t just hide in the Magnificent Seven anymore, they are looking for good values and opportunities in other stocks. They have to be selective, but there are pockets of better action in stocks that have been lagging for a very long time.
My game plan is to look for stock-picking opportunities in the context of increased market volatility.
At the time of publication, DePorre had no position in any security mentioned.
