August 25th, 2023
Bad News Is No Longer Good News
What happens when you hope a single ticker will bear the brunt of the entire market? The positive momentum leading into Nvidia’s (NVDA) earnings report was halted at the end of the week. Even though NVDA had blowout earnings that showed a pot of gold at the end of the AI rainbow, investors still sold news after bidding it higher all week heading into the announcement as the hope of lowering interest rates dwindled further. While weakness in the economy will help the Fed decide to lower interest rates, it means the recession may finally be here, and that spells trouble for investors.
I know what I’ve written over the last few articles may sound like they contradict each other. I did say that bad economic data will push treasury yields lower, which would be good news for stocks.
I even showed how important it is for the 30-year Treasury Bond Futures to stay above a crucial line (in purple) that dates back to November of last year.
The problem is that bad economic data is still reflecting a poor economy. The reason the Fed can eventually lower interest rates is because the economy has been stifled enough that inflation drops. Well, a stifled economy may help interest rates on credit cards, auto and home purchases, and business loans, but a stifled economy isn’t exactly the backdrop you want as an investor.
So while many, including me, have mentioned that “bad news is good news for the equity market,” that only holds true for so long.
Could we still be headed for a soft landing and get Fed Chairman, Powell, out of the hot seat? Sure. It could happen. It certainly seemed true a month ago, but the pessimism is growing and the data is starting to show a hard landing might be coming.
In the weekly chart of the S&P 500 ETF, SPY, I see a battleground brewing at $420 ($4200 on the SPX). That’s another 3.5% drop from current prices. And look out below if that line doesn’t hold.
I think the likely scenario is that we test $420 and then go into an extended period of chop through September and possibly into October.
At some point, we will need to stop hoping that bad news means good news. While that will help in the short term, it won’t help in the long term.
What will help in the short term is some positive news coming from any of these reports.
Tuesday – JOLTS Job Openings – The report has shown declining job openings since May
Wednesday – ADP Non-Farm Employment – This report has exceeded expectations since May.
Thursday – Core Personal Consumption Expenditures Index and Weekly Jobless Claims – Core PCE is what the Fed uses to gauge inflation and while it has been heading lower, it hasn’t been getting this as quickly as everyone would like. Jobless Claims should come in between the high 230k and low 250k.
Friday – Unemployment Rate, ISM Manufacturing, PMI, Average Hourly Earnings – Friday has a host of job data to watch out for.
As you see, the week is going to be full of data to cause volatility in the market, but right now the bears have control, so be careful out there.
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Jeff Wood
Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab
Any trade or trade idea discussed is for educational purposes only. They will not be tracked as an official trade recommendation.
