Anticipation of a Pullback Is Preventing … a Pullback
The Nasdaq is strong early Monday while the Dow trades lower. Global markets are drifting higher at the start of what should be a quiet summer week.
The S&P 500 hit an all-time high last week on the bet that the Fed will not raise rates in September. However, I remain skeptical about this market’s ability to trend higher from here.
We are entering some of the slowest trading of the year, negative seasonality is kicking in, and there are few catalysts on the agenda. The economic calendar this week is thin, with Empire State manufacturing and the housing index today, housing starts and industrial production Tuesday, crude inventories Wednesday, and jobless claims and the Philadelphia Fed Thursday. None of that is likely to move a market.
Why It Keeps Holding Up
So far this market has held up much better than I expected, and I think I know why.
Too many people are thinking the way I am. The seasonal argument is well known, the catalyst gap is obvious to anyone looking at a calendar, and a lot of money has been positioned for a pullback that has not come. When the price action refuses to confirm what everyone expects, the people who positioned for it eventually have to do something about it. That is where the FOMO comes from, and it has been the dominant force in this market for two weeks.
That is not a criticism of the reasoning. The reasoning is sound. It is a reminder that being right about conditions and being right about price are different things, and the market has no obligation to deliver the second just because you have the first.
What Would Change It
Two things would change my mind.
The first is a sharp intraday reversal with a close near the lows. That is the character change that usually marks the end of a stretch like this. Not a headline, not a gap down, but a session where the market opens strong and the sellers take control by the afternoon. The pattern we have had recently is the opposite, with steady trend days closing on the highs, and when that flips it means something.
The second is a headline that triggers concern. Iran is the obvious candidate. The negotiations do not appear to be moving forward, and the war has become a question of who blinks first under economic pressure. So far that is not tripping up the market. West Texas Intermediate rose 5.4% last week to $82.40, the largest weekly gain since late July, and stocks made a record anyway.
Oil is little changed Monday morning despite the apparent impasse, which tells you the market has decided to look past it until something forces the issue.
This Week’s Actual Catalysts
The retailers are the real news. Walmart ($WMT), Target ($TGT), and Home Depot ($HD) all report earnings, and after Friday’s weaker-than-expected retail sales those reports will carry more weight than they normally would.
The FOMC minutes arrive Wednesday. Given that three members dissented in favor of a hike at the last meeting and Kevin Warsh declined to signal anything about the path ahead, the minutes may be more informative than usual.
Beyond that, the Jackson Hole symposium at the end of the month is the next real opportunity for policymakers to say something about where they are headed.
My Game Plan
My positioning has not changed. Cash is high and I am selective about entries.
I am not fighting this market and I am not chasing it either. The names I want have not pulled back enough to be interesting, and forcing entries into thin August trading is how traders give back what they made in July.
If the character shifts, the setups I have been waiting for will develop quickly. Until then I am content to let a slow week be slow.
At the time of publication, Rev Shark had no positions in any securities mentioned.
