WHAT IS MOVING THE MARKETS?
10 Headwinds That Remain in Place
In response to the recent steep pullback in stocks from their August highs, last week our Market Outlook focused on how uncertain and potentially volatile September (and October) can be to the stock market. You can review its charts and analysis here.
What prompted this week’s rally?
There are various drivers of the positive action.
- Oil prices have been falling quite steeply (see chart below). This will help take pressure off the escalating inflation picture.
After hitting a high of $120 a barrel in June, oil prices have declined by about 30% to the low $80’s. Some of this is due to seasonality, demand destruction (people are not driving as much), and a global slowdown (especially in Europe) which has caused additional supplies to come online.
As you can see in the chart above, the price of oil is now below both the 50 and 200-day moving averages. In fact, the 50 crossed below the 200 on Friday, which is viewed as a negative indication for future oil prices.
Oil’s trend is bearish, but this has helped relieve some inflationary pressure which in turn is a net positive for the stock market.
- Many commodities have declined in price (see a chart of DBC below). DBC is an ETF that tracks a basket of commodities, including oil and gas, softs (i.e., corn, soybeans, wheat, and sugar), gold, silver, and industrial metals (i.e., copper, aluminum, and zinc).
Materials such as copper and lumbar have fallen due to the sharp decline in housing construction.
- Interest rates have had a volatile summer. 10-year Treasury bond rates peaked in mid-June, then pulled back substantially (which spurred the June to early August stock rally).
After Fed Chairman Powell’s infamous breakfast remarks at Jackson Hole in late July, the 10-year interest rate rose quickly again (see chart below).
During the last three days of the week, bond prices consolidated, which benefitted the stock market.
- An oversold stock market which was due for a bounce. Many of the sentiment readings were extremely negative, and the momentum indicators (RSI) were also deeply oversold. As a result, it was not surprising to get a significant bounce after 3 negative weeks.
- Transportation, small-caps, and retail stocks, all important members of Mish’s Modern Economic Family, have held up above their all-important 50-day moving averages. This has signaled a potential bounce coming (see Mish’s instructional video about these three areas here)
Use the link below to see Mish’s recent analysis from recent national TV appearances. They’re edited down to concise nuggets of valuable insights.