There is an old adage “to buy the hype and sell the news”. The hype, in this case, being the Federal Reserve’s decision to raise interest rates and the Second Quarter GDP. While politicians and pundits argue over the definition of recession and whether the US is in a recession or isn’t, last week the stock market clearly signaled we are in an economic downturn.
But one might ask, how can stocks go up if the economy is going down? It’s because Wall Street was banking on the economy being too weak to support interest rates moving much higher. In fact, some speculate that economic weakness could lead to the Fed reversing course and lowering rates sooner than expected.
Last week, stocks went higher as Wall Street bought on hype and the prospect of the Fed reversing course. This week, stocks went into reverse as US Manufacturing PMI recorded a reading of 52.8. (1) Generally speaking, anything above 50 is considered economic expansion which dilutes the chances of Jerome Powell and the Federal Reserve changing course.
However, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said, “July saw US manufacturers report the toughest business conditions since 2009.” That’s the subprime crisis and apparently worse than Covid.
Regardless of economic news and its interpretation, some profit taking is not out of order as the NASDAQ rebounded more than 17% since hitting its bottom of 10,565.14 on June 16th. Sellers rejoined the game Monday as the NASDAQ approached 12,500, a clear line of resistance on its chart.
In the near-term, we are more likely to see a couple of more days of selling, but we anticipate the NASDAQ might pivot higher somewhere close to 12,000 with choppy trading until the index bypasses 12.5k.
Our market outlook remains the same today as it was in this newsletter last week, stick with the new trend of buying the dip until the trend is no longer a trend. Index investors might consider an exchange-traded fund (ETF) like Invesco QQQ Trust (QQQ) especially the closer the NASDAQ gets to 12,000. On the downside, we’d consider cutting losses if the NASDAQ closed below the 50-day moving average of 11,550 and rising.
Commodities like Energy, Metal, and Mining rebounded last week and showed well on our industry/sector performance leaderboard. However, we aren’t sure how much staying power they will have in the near future. Crude oil had a rough day Monday, but gold moved higher. Of the two, we lean towards gold but would likely avoid both for the time being.
Instead, Technology is where we might fish, especially in the Semiconductor space considering the latest Washington spending bill focusing on building semiconductor plants in the US. An ETF like SPDR S&P Semiconductor ETF (XSD) could make sense for investors looking for exposure to the semiconductor sector. Much like our take on the NASDAQ, the XSD ETF could experience additional weakness in the days ahead and we’d consider getting out if the fund closed below its 50-day mark of $165.76 and climbing.
As much as we want to add a semiconductor from SPDR S&P Semiconductor ETF’s (XSD) holdings, many look a touch overextended now. We’ll wait a week to see which names move into a more comfortable position.
1 – https://www.benzinga.com/news/22/08/28293410/s-p-global-u-s-manufacturing-purchasing-managers-index-where-is-the-overall-economic-trend-headed