Stocks finished flat today following a morning rally that failed to stick. The Dow, S&P, and Nasdaq Composite were unable to recover yesterday’s losses.
The initial gains of the day were driven mostly by weak economic data after July new home sales missed estimates badly (511,000 new homes sold vs. 574,000 expected) and the flash August PMI revealed a stunning services sector slump (44.1 vs. 49.2 expected).
Despite falling demand for new homes, investors also learned that the median price for a new home increased by 9.2% from June ($402,000) to July ($439,000). New and used home prices are expected to fluctuate as demand weakens further.
On the August PMI, falling demand was also blamed for the poor data.
“Material shortages, delivery delays, hikes in interest rates and strong inflationary pressures all served to dampen customer demand, according to panelists,” the report said.
Both reports (housing and PMI) were potential “pivot bait” for the Fed to consider when it raises rates next month. Fed Chairman Jerome Powell’s speech at Jackson Hole on Friday may give the market a window into how the Fed is feeling about the economy and whether FOMC participants think a “soft landing” is possible.
Hint: it probably isn’t.
“The big story for the second half of the year is how soon and when and whether the Fed can get inflation under control,” said Michael Creadon, a former hedge fund CEO.
“And to the extent that they’re able to demonstrate softer inflation numbers, that’ll be hugely positive for risk assets.”
Sound familiar? It’s what we (and other analysts with their ear to the street) have been saying for months. It’s also backed up by price action on the S&P chart, which has operated with the understanding that weak economic data is bullish and high inflation is bearish over the last year.
It’s been all about the Fed since the pandemic hit (or arguably since 2008). That makes Powell’s speech this Friday another make-or-break moment for stocks. And, historically, bulls like it when the man talks.
But what if he disappoints? There are plenty of stocks out there with sky-high valuations that are just begging for shorts. A great example of that is Lowe’s (NYSE: LOW), which closed today below the 10-day moving average after closing below its bullish trend (yellow trendline) last week.
The stochastic indicator also suggests that LOW has room to fall. The stock has gone on an absolute moonshot since late June, too, outpacing the general market. Longer-term, a LOW retracement could potentially get quite ugly.
If LOW heads lower, it may head as low as its bearish trendline (yellow trendline) before it finds support to bounce higher. It may also bottom off the late June low if the general market ends up testing its lows again, too.
For those reasons, it might make sense to take LOW short with a trade trigger of $205.21, below today’s low, as investors await Jackson Hole on Friday.