US stock index futures were little changed on Monday but with a slight downside bias following a week of steady gains. Last week, the Dow finished up 1.7%, while the S&P 500 and Nasdaq Composite added 0.9% and 0.8%, respectively. But it was the small-cap Russell 2000 which outperformed, rallying an impressive 3.1%.
Both the S&P 500 and Nasdaq have now posted four positive weeks out of the last five, and gains have been underpinned by optimism that the Federal Reserve may cut rates later this year. The CME’s FedWatch Tool suggests an 85% likelihood of a 25-basis point reduction at next month’s meeting. But some analysts are pondering if the Fed could cut by as much as 50 basis points, just as it did at the same time last year.
This comes despite last week’s CPI and PPI inflation data, with the latter coming in far hotter than expected. Yet the Federal Reserve may choose to look through this, once again insisting that above target inflation is transitory, this time due to tariffs. Instead they may focus on recent weakness in Non-Farm Payrolls as a reason to cut borrowing costs.
Attention will turn to the Federal Reserve’s Jackson Hole Economic Symposium later this week, with investors keen to interpret any signals from Chair Jerome Powell and his colleagues on the timing and size of potential cuts. But with a stack of important data updates between now and 17th September, Mr Powell is unlikely to want to box himself in.
The lack of progress at Friday’s Alaska summit, the upcoming Zelenskyy–Trump meeting in Washington, and the Jackson Hole Economic Symposium all remain potential catalysts for market swings. For now, volatility is a touch elevated but still contained, suggesting markets are preparing for movement without fully pricing in a sharp spike in risk.
Earnings also remain in the spotlight, with big-box retailers, Walmart, Target, Lowe’s and Home Depot, all set to report results. So far, according to FactSet, of the 90% of S&P 500 companies that have reported, 81% have beaten estimates on both earnings and revenues. Overall, The S&P looks extended and somewhat fatigued having rallied steadily and relentlessly since April.
In addition, the daily chart shows continued negative divergence between the S&P and its MACD. The latter has been trending lower since peaking in mid-May, while the S&P itself has pushed to new highs. This suggests that upside momentum is fading, and that recent buying has lacked conviction. While this is a concern for the bulls, this situation can continue for a long time. That makes it unreliable when it comes to the timing of any correction.
Source: TN Trader
So, the fact that the ongoing rally is long in the tooth and shows signs of losing momentum, that doesn’t mean that the S&P can’t push higher. The big question for those anticipating a significant downward correction is what could trigger a sudden loss of bullish momentum? And the next question is, should the market correct downwards, how long will it take before the dip buyers emerge?
