As Fear Drives the Market, Here’s What We're Watching to Get Off the Bench
Despite the recent market pain, the S&P 500 has yet to become oversold.
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* Investors anxiety continues to pressure stocks with the Nasdaq Composite down 10% from its peak.
* Buffett’s sale of Apple, Iran-Israel, Hurricane Debby, and narrowing H2 2024 EPS expectations for the S&P 500 have added to that anxiety.
* Today’s July Services PMI report is the next part of the economic puzzle.
* We will be watching for indications our holdings and potentially the market are oversold before making any moves.
Alright folks, based on what we’re seeing early this morning, the pain of last week is set to continue as we kick off this first full week of August. Even though the S&P 500 has pulled back 5.7% from its recent peak on July 16, it still isn’t technically oversold given its RSI reading near 38.8. Meanwhile, the Nasdaq Composite has entered correction territory with a 10% drop from its July 10 peak. Here too, however, that market indicator isn’t quite yet oversold with its RSI at 35.7, but based on what we are seeing so far this morning in the markets and investor sentiment that could slip to "Extreme Fear," we could get there today.
Stoking those fears is the news that “Uncle” Warren Buffett cut his holdings in Apple AAPL even though the Berkshire Hathaway BRK.A BRK.B stake still stands at $84 billion. Given Apple’s weight in both the S&P 500 and the Nasdaq Composite, stories about that will no doubt weigh on the market today. Meanwhile, reports are Iran will seek to punish Israel, amping geopolitical tensions, and Hurricane Debby is expected to make landfall in Florida today.
There is also the adjustment to H2 2024 S&P 500 EPS expectations we’ve been concerned about. While Q2 2024 earnings season has been arguably better than many expected, leading the consensus S&P 500 EPS forecast higher, the rate of EPS growth in H2 2024 has slowed to 8.8% compared to more than 11% just a few short weeks ago. We have another few waves of earnings the next few weeks that will bring earnings from the last 25% of the S&P 500’s basket. Odds are we will see further revisions to H2 2024 EPS expectations for the S&P 500, especially as more consumer-facing companies, including retailers, report their upcoming quarterly results.
One of the factors that is fueling the continued pain in the market is renewed concerns over the pace of the economy. Friday’s much weaker-than-expected July Employment Report followed ISM’s July Manufacturing PMI, which showed that part of the economy continued to contract. Both will weigh on GDP expectations for the current quarter, but today brings the July Services PMI reports from S&P Global and ISM at 9:45 a.m. ET and 10 a.m. ET.
Over the last few quarters, the Services part of the economy has carried things, and if this morning’s reports show that continued in July, it could help stem the recent market tide. However, if those reports show the Services economy weakened in July, it could add to the pressure on the market. If that is the scenario that unfolds, it would be another reason to think the market could become oversold before too long.
Sticking with the economy, the next update for the Atlanta Fed’s rolling GDP forecast, better known as its GDPNow model, for Q3 2024 will be published on Tuesday, August 6. That revision will include Friday’s Employment Report and today’s July Service PMI data. Granted it will only be based on a handful of July data points, and we’ll get many more as we move through the quarter, but how tomorrow’s revision stacks up against Q2 2024 GDP figures will be a focal point for investors. What makes that especially so this week is the overall lack of fresh economic data after today’s reports, and indications we have just two Fed speakers between today and the next four days.
Our Plan
As we shared last week, our plan is to sit on the sidelines at least until we have today’s economic reports in hand, and we have a clearer picture of the speed of the overall economy. We recognize that in times like this the market will remain in a “shoot first, ask questions later” mood. While painful in the short term, especially because of the drops we’ve seen over the last month in portfolio holdings like Marvell MRVL, Universal Display OLED, Qualcomm QCOM, The Trade Desk TTD, and a few others, we’ll continue to mind the underlying fundamentals and technical setups, especially RSI levels. For example, OLED’s RSI points to the shares being oversold, while levels for QCOM and MRVL suggest such status is near.
While we keep tabs on those levels as well as others for our holdings, we will also be watching the RSI levels for the S&P 500 and the Nasdaq Composite. Above we shared where they were coming into this week, but if we see them move closer to or into oversold territory (RSI below 30), that could help us get off the bench and slowly put some capital to work.
At the time of publication, TheStreet Pro Portfolio was long AAPL, MRVL, OLED, QCOM and TTD.
