Bonds Gaining Strength as Market Searches for Soft Landing


The HCM-BuyLine® went negative for a short period of time and moved us to reduce exposure to equities, only for the market to regroup and push back up above the HCM-BuyLine® and move us back into the market. Fed Chair Powell and some key data points can change the outlook for equities and bonds in short order.


Chart: TLT 1-year daily

The market is starting to broaden out, as seen by the Russell 2000 ETF (IWM) which had a nice uptick last week. This gives a supportive outlook for a soft landing. Bonds are looking more active than they have in over two years, and the 20-Year treasury ETF (TLT) is gaining strength.

NVIDIA (NVDA) reports earnings after the bell today and all eyes will be watching how that stock trades. NVIDIA is one of the leading firms in the AI space, which has been one of the most interesting areas of the market this year.

Initial claims for unemployment insurance increased 13,000 last week to 231,000, the highest level in nearly three months, and above the consensus estimate of 222,000. It was the third increase in the past four weeks, as layoffs have picked up somewhat in Q4. The four-week average of claims rose 7,750 to 220,250. Although still low by historical norms, the pickup in initial claims in recent weeks reflects some easing in labor demand. The lagged impact of Fed tightening is beginning to show up in the data.

Moreover, continuing claims in the prior week increased 32,000, up for the eighth consecutive week, to 1.865 million, the highest level since November 2021. The insured jobless rate also edged up to 1.3% from 1.2% in the week before, an eight-month high. These indicators suggest that it takes longer than earlier in this cycle for displaced workers to find new employment, which is another sign of easing labor market conditions.

Along with softer than expected inflation reports this week and signs of slowing economic growth in Q4 (e.g., falling retail sales and industrial production in October), the cooling in the labor market makes additional rate hikes unwarranted.


Chart: SPY 1-year daily

Improving Breadth Offers Positive Outlook


Chart: QQQ 1-year daily

The HCM-BuyLine® has firmed up substantially after last week when Fed Chair Powell made some dovish comments which sent the market into rally mode. The market has gone from oversold to overbought in a week and a half. QQQ, the ETF which is tech heavy, is now pushing up against resistance, and a pullback could happen in the next few days. If the market can hold, and the QQQs can break above the $371-$372 area with some conviction, this would be a positive move for the bulls to be back in control.

The breadth of the market has been much better than it was in recent months. Small-caps made a strong move higher after being negative for the year, which is an indication that the market is trying to spread out. This year has been all about the magnificent 7 stocks.


Chart: SPX 3-year daily

The S&P 500 came down and touched its longer-term trend line and held, which is also a positive development. Yet even with last week’s rally, we still have some concerns. Could it have been new buyers coming back into the market taking positions, or possibly a short covering rally that will start to fade?

There were clear and abundant signs of slowing in the labor market in October. Nonfarm payrolls increased by 150,000, below expectations of 170,000 and our estimate of 190,000. Additionally, the prior two months were revised down by a total of 101,000. From the initial release to the final revision, payrolls have been revised lower in 7 of the past 8 months. Nearly all of the jobs came from the non-cyclical private education and health services and government sectors. The average workweek dropped back to 34.3 hours. The unemployment rate ticked up to 3.9% from 3.8%, matching our forecast, but above the consensus of unchanged. Only the y/y change in average hourly earnings grew faster than expected, but still slowed to 4.1% from an upwardly revised 4.3%. The cooling in the labor markets justifies the Fed remaining on hold and makes additional tightening unwarranted. The cumulative impact of prior rate hikes are finally starting to show up in the data.

Long-term interest rates have made a meaningful move lower as the 10-year broke down from the prior range, and at 4.674% is off the 5% level of a week ago. This is progress but a move below 4.5% would be more convincing.

Volatile Market as The Government Continues to Stand in its Own Way


Chart: SPX 3-year daily

The HCM-BuyLine® is negative, and we have reduced exposure to equities by a substantial amount. The equities markets are oversold, so look for a bounce up, which will probably not hold but could be an area to sell into. Early in the year, the market looked to have worked its way out of last year’s bear market, but the Fed raising rates 11 times and a Treasury department that seems to be totally lost pushed the market back into a downtrend. It will be a traders’ market for the next few months, with volatility being the norm for a while. If the S&P 500 closes below the 200-DMA today, it will have been 5 consecutive days which most see as very bearish.

Sticky consumer services prices in September are raising doubts about the downward inflation path. Housing and super-core annual inflation continue to run much hotter than pre-pandemic, while monthly price changes imply slow progress ahead. With inflation still above the Fed’s target of 2.0%, this suggests that monetary policy will likely remain restrictive well into 2024.

The PCE Price Index rose 0.4%, the same as in the prior month, while core prices, which exclude food and energy, increased 0.3%, in line with the consensus estimate. That was up from 0.1% in the month before and was the biggest gain since April. Core goods prices continued to decline, down 0.1%. But housing prices shot up 0.5%, the most in five months. Services ex-energy and housing prices, or the super-core, gained 0.4%, up from 0.1% in the month before.

Too Much Turmoil – The HCM-BuyLine® Turns Negative


The HCM-BuyLine® went negative on Friday, pushing us to reduce exposure to equities yesterday, and we will continue reducing exposure again today. There is a lot going on, not only from an economic point of view, such as the Fed raising rates 11 times and being embarrassingly behind on every decision, but also from a geopolitical perspective. Russia and Ukraine, China and Taiwan saber rattling, and Israel, our only true allies in the Middle East, against what appears to be everyone, as sad as it is.


Chart: TLT 1-year daily

The Fed has successfully crushed fixed income. Those of you who thought bonds were safe might need to rethink that. (TLT) the 20-year Treasury was at a high of $179.00 per share on 3/21/20 and is now at $84.00 a share. It will take someone who invested in those bonds in 2020 a decade to get back to even. That makes the stock market look a lot more attractive.


Chart: RSP 1-year daily

It is truly a bizarre market, with just 7 stocks leading the rally and not much more. The equal-weight ETF (RSP) of the S&P 500 is down -3.5%. If you have not been heavily invested in the magnificent 7, you in all probability have made no money or are down for the year on your investment.


Chart: SPY 1-year daily

We will reduce exposure and be patient and wait for the trend to turn back up. There will be opportunities, but for the time being, letting this storm pass is the prudent course of action.

Investors Navigate Recession Fears After Difficult Quarter for The S&P


Chart: SPY 1-year daily

Even with the recent selloff the HCM-BuyLine® remains positive, but it has weakened, and we are monitoring it closely. This is truly a tale of two markets. If you have not been heavily invested in what has become known as the magnificent 7, meaning the 5 FANG stocks plus Nvidia and Tesla, you have made no money this year. RSP, the ETF of the equal-weighted S&P 500 is down -.84% YTD.


Chart: RSP 1-year daily

The U.S. economy appears to be on a path towards a soft landing, but we can’t underestimate the risk of a recession as near-term concerns rise. While Q2 real U.S. GDP showed a 2.1% annual growth rate, economic growth is likely to slow in Q4 and in 2024 (due to student loan repayments, strikes, etc.), labor markets should cool and get back into balance, and impacts from credit tightening should be increasingly felt.

The third quarter brought a market pullback for stocks, with the S&P 500’s first negative quarter since Q3 2022. Shifting sentiment from recession concerns to uncertainty about economic growth and inflation influenced market performance. Historically, a Q4 rally often follows a down Q3, and we remain constructive of stocks moving higher in Q4.

The equity put-call ratio spiked to 1.97 intraday. This is a huge reading, reflecting investors disproportionately buying puts–meaning investors are bearish. But as we know, when market participants make an extreme move in one direction, the forward path tends to be the opposite.

In the past 30 years, or 7,650 trading sessions, an intraday spike of 1.97 has only been seen 20 times, or 0.20% of all trading sessions. That is an extreme reading and shows how much fear has been created in the past week.

The recent employment report was truly stunning. Payrolls expanded by a whopping 336,000 in September, well above the highest estimate in the Bloomberg survey, double the consensus of 170,000, and above our estimate of 140,000. Additionally, the prior two months were revised up by a total of 119,000, the most since December 2021. Despite all the job creation, average hourly earnings increased just 0.2%, bringing the y/y change down to 4.2% from 4.3%, which was in line with expectations. This may be explained by an ongoing mix shift. Although job gains were broad-based, they were concentrated in lower paying industries. The unemployment rate remained at 3.8%, above expectations of 3.7% but in line with the forecast.

HCM-BuyLine® Unwavering Despite Headline-Induced Volatility


Chart: SPY 1-year daily

Last week was a central bank-intensive week, with policy decisions coming from major central banks including the Fed, Bank of England, and Bank of Japan. Volatility was primarily centralized around Wednesday’s FOMC decision, with the S&P 500 falling 2.8% and US 10-Year surging since then, as markets digested a “more hawkish” 2024 SEP than originally anticipated.

The market sold off last week, which looks to be a classic retest of the previous near-term low. The HCM-BuyLine® is still positive, so pullbacks should be considered buyable, and this pullback is no different. A lot of factors are putting pressure on the markets, such as the Fed’s hawkish tone, the United Auto Workers (UAW) strike, and what appears to be another government shutdown, which is getting old by the way. Despite headline risks in the near-term, we remain constructive through year-end as inflation remains key and we believe it is on a glidepath lower. We still see the market having a meaningful rally going into Q4, possibly going up to 4700 on the S&P 500.


Chart: TLT 1-year daily

The 20-year treasury just keeps going lower, from a high of around $107 in early 2023 to around $89.00 today, which is about a 16-17% drop YTD. But, if you go back to 2020’s high of $170.00 all the way to today’s price of $89.00, that is nearly a 50% drop in the price of TLT, and this is a government-backed bond. It could take a decade to recoup that much of a drop. You are better off with dividend-paying stocks.

The Chicago Fed National Activity Index (CFNAI) fell 0.23 points in August, down in three of the past four months, to -0.16. Its three-month average was little changed at -0.14, and has been in negative territory for the past ten months. Even so, it has not deteriorated to levels consistent with recession. It suggests continued economic growth at a slower pace in Q3.

Summer Vacation Is Over, Could September Be Hotter Than August?


Chart: SPY 1-year daily

I know I sound like a broken record, but as long as the HCM-BuyLine® is positive, which it is, all pullbacks should be considered buyable. August is historically a lousy month for stocks. A lot of people are usually on vacation, and several other factors typically affect the markets in August. That said, September tends to have a much higher success rate, and the markets could be looking at a 2-4% move up in the indexes.


Chart: XLE 1-year daily

Energy likely can continue its gains on an absolute and relative basis, given evidence of the global market tightening up while US inventories are being drawn down rapidly.

In recent months, Saudi Arabia has announced supply cuts during the first week of every month, and announced previously that the cutback would extend into September.  Given supplies from other producers like Iran and/or Venezuela might pick up, and Crude has languished during August, it might make sense for Saudi Arabia to announce a further supply cut.

ADP private payrolls increased 177,000 in August, the fewest in five months, and below the consensus estimate of 200,000. It was a dramatic step-down from the prior two months’ gains which were more than 300,000 each. On the heels of a significant reduction in job openings in the previous month, this suggests a substantial moderation in labor demand and job creation. It implies continued downward pressure on wage growth which should help move inflation toward the Fed’s target of 2.0% over time.

JOLTS show labor demand cooling Job openings fell 3.7% in July, down in six of the past seven months, to 8.8 million, the lowest level since March 2021, and below the consensus estimate of 9.5 million. This suggests a significant moderation in labor demand. There were notable reductions in professional and business services, health care and social assistance, and government sector jobs. Hires also fell, down 2.8% to 5.8 million, the fewest since January 2021. While layoffs were little changed and remained low, the quit rate dipped to 2.3%, its lowest level also since January 2021 and in line with the pre-pandemic rate. It suggests waning worker confidence in their job prospects, similar to the findings in the Consumer Confidence survey below.

Navigating The Pullback With NVIDIA Earnings On The Horizon


Chart: SPY 1-year daily

The markets are now oversold with the most recent pullback. As we have said before, all pullbacks should be considered buyable as long as the HCM-BuyLine® is positive, which it is. Semiconductors are looking like they could be a good area to place money; a good ETF is SOXX and of course like we talked about last week AMD and (NVDA) NVIDIA Corp have also pulled back. NVDA reports earnings on Wednesday; this might be one of the most anticipated earnings calls I have seen in a long time. The market has been excited about AI and NVDA is one of the leaders in this area. It could be a volatile market in after-hours trading on Wednesday, so be prepared.


Chart: SOXX 1-year daily

Fed chair Powell speaks at Jackson Hole, which could lead to the short-term sell coming to an end. He will either be dovish or hawkish, but it should make things interesting either way.


Chart: TLT 1-year daily

The 20-year treasury, as seen by the ETF TLT, is looking horrible as far as price goes. Any increase in interest rates has sent the bond market sprinkling down. There was big sell volume in the last few weeks as investors have been dumping intermediate and longer-term bonds fast. This could be a good sign that stocks could find a bottom, as the last time there was this much selling in TLT was 3/20/20 and that was a bottom for stocks.

The Conference Board’s Leading Economic Index (LEI) fell 0.4% in July, matching the consensus. This was its 16th consecutive decline, but also the smallest drop since August 2022. It suggests the near-term outlook for growth remains uncertain but leans toward negative. The Conference Board projects “a short and shallow recession in the Q4 2023 to Q1 2024 timespan.”

Most LEI components either declined or held steady last month. The biggest negative contributions came from falling manufacturing new orders, worsening consumer expectations for business conditions, and higher interest rates. The six-month rate of change of the LEI was near-steady at -4.0% and close to its recent low of -4.6%. The majority of LEI components have worsened over the past six months. The diffusion index inched down to 30% in July, and has been below 50% since March 2022. The widespread component weakness and persistent decline in the LEI are historically consistent with shrinking economic activity.

But that is not evident in the gauges of current economic activity. The Coincident Economic Index shot up 0.4% in July from flat in the prior month. It was its biggest gain since January, led by a rebound in industrial production. The lagging index was practically unchanged. As a result, the Co/Lag jumped 0.4%, up in three of the past five months and by the most since October 2021. In contrast to the LEI, it suggests a trend of improving growth. On a y/y trend basis, it is still down 4.2%, but the negative momentum has eased from earlier this year, as the risk of recession has diminished since then.

Buying Opportunities Abound After Recent Pullback


Chart: SPY 1-year daily

The market has pulled back to the point where it should be considered buyable. The trend is still very strong, and the HCM-BuyLine® is positive. Pullbacks are healthy; markets always adjust and reset, even in a bull market. I would not be surprised to see a pretty good move back up in the last two weeks of August. Remember, August is historically a weak month for the market. Many managers are behind this year and will be trying to play catch up, and many retail investors are way under-invested, making a strong case for a solid year-end rally.


Chart: SOXX 1-year daily

The Semiconductors ETF (SOXX) has pulled back, along with two stocks tied to AI: Nvidia (NVDA) and AMD (AMD). All three look attractive at these levels.


Chart: AMD 1-year daily

The progress in CPI inflation stalled in July, as shelter and other core services prices continued to exert steady-to-upward pressure. Favorable base effects have waned. The three-month annualized core inflation rate, which sidesteps the base effects, eased to 3.1%, the least since September 2021, but it is still markedly higher than pre-pandemic. Trends and expected stabilization in some core components, such as used vehicle prices, suggest that further progress will be slower and more difficult to achieve. The Fed’s fight on inflation is not yet over. Regardless of whether the Fed hikes again by the end of this year, we expect the Fed to keep rates higher for longer.

The Consumer Price Index (CPI) increased 0.2% in July, in line with the consensus. Core CPI also rose 0.2% and in line with the consensus. It matched the gain in the prior month, which was the smallest since February 2021. Subdued core price growth was due to the outright 0.3% decline in core goods prices, down for the second consecutive month, and by the second most since April 2020. In contrast, core services prices rose 0.4%, which was an acceleration over the prior month’s 0.3% gain.