Upcoming Inflation News Adds Potential Danger to a Market Already in Trouble
While concerns about inflation have dropped sharply, any uptick at this point would be a very unwelcome surprise.
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The market is in poor shape following the worst week of action in 2024. The primary culprit for the weak action is that the Goldilocks economic narrative is starting to deteriorate as worries grow about economic growth in front of a very likely Fed interest rate cut on September 18.
That August Jobs Report on Friday was weaker than expected, and there were also more downward revisions of prior months' data. The report was bad enough to raise concerns about a potential recession, but was still strong enough to reduce the likelihood of a half-point cut at the next Fed meeting.
An additional problem for the market is that September is historically the weakest month of the year, and that can be a self-fulfilling prophecy. The poor technical action confirms negative seasonality, and negative seasonality confirms the poor technical action. Why fight it?
In recent years, market participants typically dealt with economic worries about inflation and growth by hiding in the Magnificent Seven names. They were viewed as safe havens that were riding the booming AI industry, and their valuation didn't matter much. In fact, because of relative strength they were viewed as conservative plays even though the P/E ratios often looked extreme.
The market is now faced with the problem of lack of leadership. The mighty Nvidia NVDA has lost its mojo and is struggling to find support. Speculation in Bitcoin IBIT has also turned weak, and the rotation into small-caps is no longer helping traders.
The primary issue that the market faces this week is that there isn't much news flow on the agenda. There are a couple of earnings reports of note from Oracle ORCL and Adobe ADBE, but the big news will be the CPI and PPI reports on Wednesday and Thursday.
While concerns about inflation have dropped sharply, any uptick at this point would be a very unwelcome surprise. There are clear signs of economic slowing, but if inflation upticks, then we will start to hear the 'S' word — Stagflation. The market is confident about inflation, although if inflation stays sticky, it could be an ugly curveball.
Many market players were anticipating that a Fed rate cut on September 18 could be a sell-the-news event, but with the corrective action taking place now, that changes the dynamic. It is likely that selling on a Fed cut was so well anticipated that market players are trying to move ahead of the event and accelerating what was expected. A rate cut could turn out to be a positive catalyst if the selling continues at this point.
It is a very tough market right now, with poor technical action and no signs of good support. There are some good values developing, but they could easily move lower while the market continues to struggle.
There is a little bounce action early on Monday morning. However, there are many trapped bulls who are likely looking to escape into some strength.
At the time of publication, Rev Shark had no positions in any securities mentioned.
