/ September 07 / Weekly Preview
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Monday:
N/A
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Tuesday:
N/A
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Wednesday:
N/A
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Thursday:
PPI MoM (0.4% exp)
Core PPI MoM (0.3% exp.)
Initial Jobless Claims (205K exp.)
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Friday:
Core Inflation Rate YoY (2.4% exp.)
Inflation Rate YoY (3.4% exp.)
Michigan Consumer Sentiment Prel (51 exp.)
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Monday:
N/A
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Tuesday:
GameStop Corporation
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Wednesday:
N/A
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Thursday:
Oracle Corporation
Adobe Inc.
Macy's Inc
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Friday:
Kroger Company (The)
Good News Is Bad News (Again)
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You would be excused for thinking last week was decidedly boring. The S&P 500 ended just about where it began, though there was a degree of bumpiness involved. Stocks dipped to start the week, as oil spiked on fresh Middle East hostilities. Midweek brought a recovery, as Fed Governor Chris Waller sounded more dovish than expected and yields retreated. Finally, on Friday, the strong August jobs report (162K vs 56K expected) was read as a hot print and caused renewed selling.
As today’s article points out, we’re in a “good news is bad news” regime again. Strong payrolls should normally be viewed as a positive indicator for the economy, but not in this cycle.
August payrolls rose by 162,000, well above the roughly 53,000 anticipated, while the unemployment rate remained at 4.1%. With Chair Kevin Warsh’s Fed prioritizing inflation control over labor-market support, a strong jobs print is seen as hawkish, prompting traders to push the probability of a September rate hike to about 52%.
The weekly sector performance graph reflects the current market predicament. The Nasdaq Composite closed at 26,506.99 and the Dow at 53,414.25, with the Dow down -0.2% for the week and the Russell 2000 essentially unchanged. Beneath the headline numbers, activity resembled a rotation rather than a broadening rally: energy surged +2.2% as crude rallied over +9% amid Strait of Hormuz supply concerns, technology rose +0.9%, while seven of twelve sectors finished lower, led by consumer discretionary, which fell -1.9%.
Interest rates are still the narrative focus for most market participants. The 10-year Treasury yield rose to roughly 4.79%, close to a three-year peak, while the 30-year remained above 5.2% and long-term bonds declined over the week. Gold eased as the dollar weakened, and high-yield credit drifted lower. In the aggregate, this represents a slight risk-off positioning.
The buyers that showed up in August are starting to pull back. The tape confirmed it, showing a flat headline index from a shrinking group of leaders while the rest of the market sold off underneath.
The Equally Weighted S&P 500 (RSP) fell -0.74% on the week, and is starting to reverse a trend which recently stuck the upper limits of the RSP / SPY ratio. Since this ratio is highly mean-reverting, it does not come as a surprise that mega caps are starting to outperform their peers. We can also see the impact of investors seeking the safety and liquidity of established names in the S&P 500 (again, a relative risk-off move).
This week, the focus will shift squarely to the CPI and PPI reports. Those reports will determine whether Friday’s strong jobs figure backs a Fed rate hike, or whether the data lose significance once inflation figures arrive. Inflation, not the payrolls report, will dictate the Fed’s decision at the September 16 meeting.
Technically, the primary medium and longer term trends all remain bullish for now in the equity market. SPY trades above all key moving averages, which in turn are positively aligned and rising (20-DMA > 50-DMA > 200-DMA). Short term momentum is subdued (14-day stochastic is 68, pretty much neutral) and the daily MACD signal is negative. The market is not oversold by any stretch of the imagination, but momentum is lacking.
Downside risk remains this week, with the primary area of support standing at $754 (M-Trend & 50-DMA, roughly -1.75%). The first level of resistance is the August record ($778), with further upside limited to $792 (R1). However, the $790 - $800 area is more of a year-end target rather than something to be achieved immediately, so the most likely path for now is lower, not higher.
Market breadth tells the same story, through the perspective of sentiment. Our proprietary metric decreased this week to a soft 46/100 reading. This is close to “Fear” levels, in stark contrast to the near record levels of the index. It reflects the reality that most portfolios have not kept up with the benchmark ETF during the last month or 2.
This is also explained by the performance of various Sectors.
Seven of eleven sectors declined last week, yet the overall index ended essentially unchanged. Consumer discretionary, industrials, and materials led the downturn, while a narrow group of energy and mega-cap technology stocks held ground. In short, the headline market looked stable, but the typical stock underperformed. Leadership is rotating rather than broadening and reflects a type of internal weakening that often precedes a more meaningful pullback. Since sentiment is already deteriorated, this will “feel worse” than it is.
To be fair, if the market manages to clear ATH values of $778, the momentum chase is back on. However, this possibility is rather small, as there are several risks ahead and a loss of marginal buyers which is to blame for the traditional September negative seasonality.
The market is closed on Monday for Labor Day and the key events of the week land at the very end. PPI lands Thursday morning and CPI follows Friday, both feeding directly into the September 16 FOMC decision. While the upside payroll surprise certainly heightened rate-hike concerns, the outcome will hinge on this week’s inflation numbers. If the prints come in cooler than feared, the Fed will have more space to maneuver around a rate hike. If both come in hotter than expected, a hike in September becomes the base case.
Besides these data points, the slate of fundamentals is relatively thin. Oracle will report after the market close on Thursday, with investors focused on AI cloud demand and hyperscaler capital expenditures. The semiconductor sector and the broader AI complex will likely swing again. Adobe follows the same afternoon. Oil remains the wildcard, as the weekly +9% surge keeps energy inflation risk alive. Thin post-holiday liquidity can exaggerate the intraday reaction.
We’re seeing a lot of capital rotation which already went into the “broad market” factors of value (IVE) and the Equally Weighted S&P 500 (RSP), as well as the Dow (DIA). On a relative basis, there’s not a lot more that can go into these areas of the market, as extensions are starting to get stretched. Meanwhile, factors like Nasdaq (QQQ), Momentum Factor ETF (MTUM) and Mega Caps (MGK) are set to become the beneficiaries of the next rotation.
September has a losing record that’s worth reiterating. Since 1928, it’s the only month that more often closes down than up. Over the past century its average return is about -1.1%. In midterm election years it falls to roughly -1.5%. The second half of September is the weakest two-week period of the calendar year. The average intra-month sell-off is -6.2% during mid-term years and -4.7% in all of the rest.
There’s a mechanical reason for that. According to Citadel Securities, retail buyers tend to fade in September. Their own data shows buying on down days has run near half its normal pace since 2019.
The corporate buyer (amajor net purchaser of equities since 2000) winds down. Firms had approved over $1.1 trillion in stock buybacks through August, but that buying pressure fades as blackout periods pick up around September 12, just ahead of third-quarter reporting.
When you do the math, the largest components of the demand side have run their course:
Post Q2 Earnings EPS Growth tailwind is behind us, not ahead;
Retail is not particularly active in September;
Corporate buyback window closes;
CTAs have already spent their dry powder;
Pension funds need to rebalance away from stocks and into bonds at quarter-end;
Furthermore, we also have to contend with the options expiry date on September 18, just after the FOMC meeting. That single day would clear the June triple-witch event, which stood near $7.7 trillion, which was itself a record.
All of the above do not guarantee a selloff, but the odds are stacked against equities at this stage. When you layer investor complacency, the setup can become risky — the VIX is trading with a 15 handle, so upside can easily manifest.
Our Trading Strategy (Sigma Portfolio)
The most likely path here is the following: we’ll get weak markets that either consolidate or sell off into the end of the month. Many stop targets are placed at around the 50-DMA market wide. An active approach would be to actively hedge at this stage, since protection is relatively cheap.
By mid-October, options will have expired, the FOMC will have met, and corporate buybacks will be back under way. The market will once again be focusing on corporate fundamentals, with Q3 earnings coming up. This is normally supportive of the market headed into November.
Therefore, the playbook here is to play defense, reduce exposure in the aggregate as well as to the high beta names, and wait for a better entry point. Raising cash is unglamorous, but it’s far preferable to do it now than to scramble later. Furthermore, downside protection is still on sale, so that’s also something we can capitalize on.
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