Markets Hit Oversold Territory, But the Big Picture Is Not So Simple
The major moves have spurred us to update our shopping list.
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* The S&P 500 and Nasdaq entered oversold territory
*Extreme Fear is now in the market, while the Volatility Index is Overbought
*But July Service PMIs strengthened month over month
*Here’s our updated shopping list
This morning’s additional drop in the market has pulled the Relative Strength Indexes for the S&P 500 and Nasdaq Composite below 30. They are both now in oversold territory. As we discussed earlier today, these are among the items we would be watching for as an indication the market drop could be nearing its end. The other item we flagged this morning – the back-to-back July Service PMI reports – both showed that part of the economy continued to expand at a solid pace during the month.
The Service PMI report from S&P Global showed a “marked expansion of business activity in July on the back of a rise in new orders.” The rise in new order activity and rising backlogs of work led to employment gains in that part of the economy. But the S&P’s findings also pointed to wage and transportation costs resulting in a sharp rise in input costs during July. Interestingly, competitive pressures limited the increase in output prices, which supports our view that margins are key to watch as we continue to assess second half of 2024 earnings per share prospects for our holdings and the S&P 500.
Also, ISM’s July Non-Manufacturing PMI report came in at 51.4, a nice increase compared to the 48.8 figure for June. Remember, the expansion-contraction line for PMI reports is at 50, so this tells us the Services economy accelerated in July and should continue into August. We say this because the New Order component rebounded to 52.4 in July from 47.3 in June. ISM’s findings also showed a pickup in Service sector job creation compared to June, but still contracting given its 49.8 figure. On the prices front, here too, we find an uptick to 57.0 from 56.3 in June. While still below the April-May levels, the month-over-month increase will not escape the Fed’s gaze.
Putting these two reports together, they should counterbalance the anxiety raised by last week’s July Manufacturing PMI and employment reports. We’ll see the outcome in tomorrow’s update for the Atlanta Fed’s GDPNow rolling forecast for the current quarter.
Our Updated Shopping List
As we discussed this morning, the market remains in a “shoot first, ask questions later” mode, with the Fear and Greed Index slumping into "Extreme Fear," as we thought it would. At the same time, the Volatility Index (VIX) has catapulted higher, putting it into overbought territory. Paired with the S&P 500 and Nasdaq Composite entering oversold territory means we will be focusing on opportunities for our shopping list of stocks that include Universal Display OLED, Qualcomm QCOM, Morgan Stanley MS, Trade Desk TTD, Amazon AMZN, Microsoft MSFT and others. As we put capital to work, we will likely start with those stocks that are extremely oversold despite the favorable fundamentals.
As it relates to our panic points, we will keep tabs on them for sure, but the oversold nature of the market will supersede those panic points in the near term.
At the time of publication the Portfolio was long OLED, QCOM, MS, TTD, AMZN, MSFT.
