I’m Ultra Cautious as Exposure’s at the Max, Retail Sales Loom, Iran Digs In
Here’s my game plan and take on the market action, incoming economic data, and volatile geopolitical scene.
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Stocks are flattish early on Friday after the S&P 500 closed at a record high Thursday. The action was driven by the flat producer price index report and a 2.5% decline in oil, which brought bond buyers back after a week of selling.
Bonds are trading lower early on Friday and news that a tanker came under attack is pushing Treasury Secretary Scott Bessent to threaten tougher restrictions on Iran’s economy. Oil is back up and is up more than 5% this week.
The Fourth Reversal in Two Weeks
Oil has had four reversals in the last two weeks and despite the lack of progress in Iran, market players are hopeful that something positive is going to happen. There doesn’t seem to be much basis for the optimism but so far that doesn’t seem to matter much.
Iran’s supreme leader has put in place a Revolutionary Guards commander who has been skeptical of talks with the United States. That suggests that negotiations have a long way to go. A senior adviser to the IRGC commander told PBS NewsHour that prolonging the war until the next presidential term is one of the options Tehran is weighing.
Another problem is that the Strategic Petroleum Reserve stockpiles have fallen to their lowest level since January 1983. The buffer that would normally absorb a supply disruption is not there.
A Record High on an Assumption
Despite the issues with oil, the S&P made its record Thursday on the premise that inflation is contained. The consumer price index came in as expected and PPI came in flat, and the market decided the rate problem was easing.
Oil is up 5% on the week with a hardliner now in charge of the Iranian side of the negotiation. The July inflation reports told us about July but the data that drives the next inflation reports are going in the wrong direction as we speak.
I am not predicting a decline. The price action has been better than I expected for two weeks running and I have said so. But a record high built on two backward-looking inflation reports, while the forward-looking input reverses, is a setup that deserves some caution rather than more exposure.
IBD Goes to Maximum
Investor’s Business Daily raised its recommended exposure to 80% to 100%, which is the maximum. That is a move from 0% to 20% on July 29 to fully invested in about two weeks.
I have written about their system several times because it is a useful illustration of how a purely reactive model behaves. It cannot raise exposure without price confirmation, which is why it sat at minimum levels while the Dow rallied in late July. Now it has all the confirmation it wants, so it is at the maximum.
Their own note has some cautionary comments. They indicated that AI hardware and memory names faced resistance Thursday, and that biotech and mining came under pressure. Those are the two groups I have been trading. A market making record highs while the leadership I own takes hits is a situation that makes me cautious. I’m more focused on the stocks that I own rather than what the indices are doing. If my stocks are stalling that is a far more important indicator than a new high in the indexes.
Today’s Data
Retail sales at 8:30 a.m. ET along with import prices, industrial production at 9:15 a.m., and business inventories and the preliminary Michigan consumer sentiment at 10 a.m.
Retail sales carry more weight than usual after a jobs report that showed payrolls declining. The market has been treating weak data as good news, because it removes the rate hike, but there is a level below which soft stops being helpful. A consumer pulling back on top of a labor market losing jobs is a different story than the one being traded this week.
Game Plan
My positioning has been increasingly cautious and the new highs do not change that. Cash is high and is getting higher and I am selective with new entries.
The exposure models are at maximum and I am at maximum caution, and both of us are looking at the same tape. Their system counts index confirmation and it has everything it wants. I count setups in individual names, and my groups are the ones under pressure.
That divergence is not a claim that IBD is wrong. It is a reminder that a reactive model and a stock picker are measuring different things, and right now those things are pointing in opposite directions.
Next week is going to be quiet as we hit peak Wall Street vacation time. Monday is empty, Tuesday brings housing starts and Home Depot (HD), and Wednesday delivers the Federal Open Mark Committee minutes along with Target (TGT), Lowe’s (LOW), and TJX Companies (TJX). The retailers will tell us more about the consumer than any sentiment survey will. It is interesting to note that the VanEck Retail ETF (RTH) rolled over hard on Thursday after hitting a high on Wednesday.
At the time of publication, DePorre had no position in any security mentioned.
