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BONUS >>> I’m going to try doing these at the end of every month… August 2020 Monthly Market Review

Also, here is September’s Trading Day Expectancy for anyone interested.

In August I was thinking about 3 major market themes that I expected would continue to emerge or completely reverse.

1. The focus on the junk bonds (JNK) and investment grade bonds (LQD). Junk bonds have remained strong indicating the appetite for high risk companies has not waned-good, news for the market. Investment grade bonds sold off into a warning phase. However, on a weekly chart, it held just where it needed to at 134.31-the area of support for now.
2. The focus on the banking and financial sectors of the market. Although those sectors saw a brief pop, XLF and KRE are pretty much exactly at the prices they were when I left. What does that mean? Most likely, these areas reflect the reality of the economy and how many loan defaults and bankruptcies continue to plague real economic growth.
3. The dollar, low rates, rising metals, up move in sugar and all the factors that still support a stagflation theory.

Is that still in play?

No doubt the recent rally to new highs in the S&P 500 and Nasdaq is impressive. However, this market remains divided, with stocks skyrocketing or languishing and not much in between. The Economic Modern Family is equally mixed with the Russell 2000 and Russell 3000 trading sideways. Regional Banks (KRE) stuck near the bottom of the range and Semiconductors (SMH) are flying.

Here is where we see the stagnation part of the stagflation theory…

To date, grains (wheat and soybeans), which I have pointed out repeatedly as trading at 100-year lows versus the SPX, have rallied well. Gold has held its gains although has yet to convincingly clear $2000 an ounce. Rates have firmed a bit while the dollar continues to free-fall. Only late this week, the dollar found some footing, which could take it to test overhead resistance. Sugar, my secret sauce for stagflation, edged higher above both the 50 and 200-day SMA’s. Sugar can continue to tell us more about rising food costs amid supply chain disruptions. I am still watching commodities, particularly gold and silver.

And now, with civil unrest a daily headline globally as well in the US, the market, which is very one-sided towards tech, could be close to overdone.

For that, volatility is a key to keep eyes on.

After a reversal bottoming pattern on August 26 (Day Trade Setup Type 15) confirmed, even while NASDAQ runs, the move in VIX (the fear index), over the 50-day SMA (Recuperation Phase) and holding above my 20-Storm Gauge, could mean trouble.

Economic News of Interest:

There are growing signs the labor market recovery from the depths of the pandemic in mid-March through April is faltering, with financial support from the government virtually depleted. Non-farm payrolls increased by 1.371 million jobs last month after advancing 1.734 million in July. Government employment rose 344,000, with 238,000 temporary workers hired for the population count. Job growth peaked at 4.781 million in June. The unemployment rate fell to 8.4% last month from 10.2% in July, even as more people entered the labor force. Economists polled by Reuters had forecast 1.4 million jobs added in August and the unemployment rate sliding to 9.8%.

The number of Americans filing new claims for unemployment benefits fell below 1 million last week for the second time since the COVID-19 pandemic started in the United States, but that does not signal a strong recovery in the labor market.

The drop in initial claims to a five-month low reported by the Labor Department on Thursday largely reflected a change in the methodology it used to address seasonal fluctuations in the data, which economists complained had become less reliable because of the economic shock caused by the coronavirus crisis.

“There are new seasonal adjustment factors this week which brings down the joblessness slightly. The labor market looks just as bad as it was and it will be a miracle if economic growth can continue at such a fast clip during this recovery if it has to drag along millions and millions of workers without paychecks.”

Chris Rupkey, chief economist at MUFG in New York

The number of people receiving unemployment benefits under all programs jumped 2.2 million to 29.2 million in the week ended Aug. 15. A report on Thursday showed growth in the services industry slowed in August. The services sector, which accounts for more than two-thirds of the U.S. economy, has been hardest hit by the pandemic.

Now, The Week Ahead…

China’s August trade data will give insight in to the speed of the recovery from the pandemic in the world’s number-two economy. On Monday, trade figures out of China are expected to show exports rose solidly for a second straight month in August, while imports edged back into growth. Chinese exports have not been as severely affected by the global slowdown as some analysts had feared and are set to be a key driver in the nation’s economic recovery. Already high tensions between Washington and Beijing are expected to escalate ahead of the U.S. presidential election in November. China remains well behind on its pledge to boost purchases of U.S. goods under the Phase 1 trade deal that took effect in February.

On Thursday, the European Central Bank (ECB) will hold a policy meeting against a background of slowing inflation and a strengthening euro. ECB officials will have plenty to discuss after the euro hit $1.20 for the first time since 2018 and euro zone inflation turned negative in August for the first time since 2016. The slide into deflation is a red flag for the central bank, which targets annual inflation of close to, but just below 2%.

The euro has been boosted by a broadly weaker dollar and improved sentiment towards the European Union’s 750 billion-euro pandemic rescue fund. As such, any impact on inflation may be temporary. But in the longer term, the ECB may be forced to reevaluate its monetary policy given the Fed’s shift to tolerate higher inflation, which could weigh on the dollar.

U.S. consumer inflation figures will be closely watched after the Federal Reserve’s recent policy shift to adopt average inflation targeting. U.S. inflation seems to have little chance of hitting 2% anytime soon and Friday’s inflation figures for August are expected to show core CPI rising 0.2% month-on-month and 1.6% on a year-over-year basis. The Fed, which is now aiming for an average has said it will not worry about inflation running above its 2% target, which is seen as giving it room to keep interest rates low for as long as it wants.

That is good news for stock markets, real estate property and other assets that benefit from cheap money.

As always, we’ll be watching Thursday’s report on initial jobless claims for weekly insight into the strength of the recovery in the labor market after the August jobs report showed that hiring slowed again last month as financial aid from the government dried up.

Index Charts:

Before we get to the state of the market, I figure it is probably a good idea to address the current violent selloff that happened in the stock market towards the end of the week.

The fact that the market suddenly fell, without notice, and on no news, should not come as any surprise to our clients. In addition, everywhere you look, media outlets have been sending a “buyer beware” message for some time now. So, the question was not “if” the market would eventually sell off, but rather “when”?

Cutting to the chase, it looks to me that the “unwind” of the speculative behavior (aka aggressive call options trading), which was likely triggered by options expiration, is creating what amounts to a version of “forced liquidations”.

Sure, profit-taking is going on here as there are lots of profits to be had in the mega-cap COVID winners. Heck, even I “right-sized” my position in Apple (AAPL) last week by taking some profits since the percentage holding in the portfolio had gotten out of hand. (And before that, we had used the joyride to the upside to rebalance our aggressive stock portfolio back to the target percentage holdings, thus “right-sizing” the positions into strength.)

When will it end, you ask? My guess is that the “unwind” part of this will take a few days and the “correction” part of this move, which was needed (as long as you’ve held the positions for a while) will last a week or two.

In my experience, I have found that having some idea of what to expect helps me keep my emotions in check, which tends to produce better decisions – especially when things appear to be falling apart at the seams.

Now let us get to the technical analysis…

S&P 500 Short-term (SPX)… I will start with the daily chart perspective as it struck of a buying climax in the short-term. My interpretation? On one hand, the correction is not likely over yet, but a daily upswing attempt is probably coming – and the Buyer’s will have to prove that this will not turn out as a 2-Try Reversal Trade Setup.

On any downside move, we have very prominent Key Support Levels at the August 3rd Gap and the Compression Breakout Support Level.

The key takeaway from this analysis I want everyone to pay special attention to is the Momentum Oscillator (MACD). As Price and Time come off, the first touch of the Zero-Line of the Oscillator is highly reliable for a bid in the market. I am telling you this now, so you have the time to gather some dry powder when that day comes to put it to good use. As the future will come into fruition, we will bring Market Profile, Key Levels, and the MACD into play to capitalize on the perfect timing for a long-term position trade.

In Credit Markets’ point of view, high-yield corporate bonds (HYG) did not decline as abruptly Thursday and Friday, and the volume coupled with the piercing tail point to no selling stampede on Friday. But, the daily setback in investment grade corporate bonds (LQD) on Friday was pronounced.

No rush in Gold (/GC) to liquidate longs, and with the current consolidation I am still under the impression of a Bull Flag or Symmetrical Triangle Price Pattern (however extended in time, because the king of metals had quite a run since recovering from the March deflationary collapse).

Copper (/HG) took off like a bat out of hell on Friday, showing signs that it is not rolling over either. The upcoming sessions will be telling but I look for its uptrend to stay in tack at least till $3.30 ish before a possible pause/pullback.

To wrap-up this Market Trading Report, the key culprit of declining S&P 500 was technology (XLK) – its volume itself calls for caution as the correction here is not likely over yet. Despite Thursday and Friday’s profound setback, the S&P 500 is still in a Bull Market. The correction though appears likely to have a bit further to run in time, as a minimum. The autumn season storms have arrived, but the medium-term picture remains bullish.

Charts of Interest:

Dave & Buster’s Entertainment Inc. Dave & Buster’s Entertainment, Inc. is an owner and operator of high-volume entertainment and dining venues under the name Dave & Buster’s. The Company’s concept is to offer its customers the opportunity to Eat Drink Play and Watch all in one location. Eat and Drink is offered through a menu of Fun American New Gourmet entrees and appetizers, and a selection of non-alcoholic and alcoholic beverages. The Company’s Play and Watch offerings provide an assortment of entertainment attractions centered around playing games and watching live sports and other televised events. Its customer mix skews moderately to males, primarily between the ages of 21 and 39. As of January 29, 2017, the Company owned and operated 92 stores located in 33 states and one Canadian province.

Dave & Buster’s Entertainment Inc. (PLAY) is my “Chart of Interest” this week. Full disclosure, we personally own this in the portfolio as we thought market participants overreacted to the Covid-19 threat. The company reports its second-quarter earnings on Thursday, September 10. With that said, taking positions on stocks that are expected to beat earnings expectations do increase the odds of success. Therefore, it is worth checking a company’s Earnings ESP ahead of its quarterly release.

As far as technical analysis is concerned, I will keep it simple… We feel at this point there is a very high probability this company will not go out of business, so at this point we have no stops in place. Any dip will be an accumulation phase as a larger percentage of the portfolio. You do have nice Consolidation Box Range from $11 to $14, I like the momentum oscillator moving to the zero line on the weekly chart with plenty of room to run. You have the first targets of the Gap at $27.08 coinciding with the 50-period weekly moving average sitting around $26.68. I want stress for us, this is a long-term investment trade, ultimately purchasing in pullbacks with portfolio examination as stock gets closer to ~$55 ish.

Conclusion

Embrace your subscription here with Pries Capital. As you work your way through your subscription, remember that this is not all-encompassing. It is a 40,000-foot view of how day trading/investing works & is designed to give you the basic information to get past the all-important question of how to get started. As time goes along, make note of any questions or highlights, & then come back to Jason, whether email or by phone, & ask questions to learn more about anything on your mind. Pries Capital is a community of all diverse types of day traders and investors, so begin participating, learning, & growing.

With that said, “We have great challenges & great opportunities, and with our help we’ll meet them together!” – Jason Pries