Commenting on today’s trading Gorilla Trades strategist Ken Berman said:
The major indices surged higher at the open, and as stocks kept pushing higher throughout the session, the benchmarks gained ground for the third day in a row. The Dow was up 371 or 1.4%, to 26,378, the Nasdaq gained 176, or 2.2%, to 8,039, while the S&P 500 rose by 54, or 1.9%, to 2,938. The number of advancing issues outnumbered decliners by a more than 5-to-1 ratio on the NYSE, where volume was above average again.
Q2 hedge fund letters, conference, scoops etc
Following Monday’s selling panic, today’s broad rally caught a lot of bears by surprise, and the majority of analysts have been calling for a ‘retest’ of the lows. The market has a tendency to prove most people wrong, and today’s session was a perfect example for that. While it’s too early to conclude that the pullback is over, the tech sector’s relative strength has to be a huge plus for bulls.
We were glad to see that the major indices finished the session near their intraday highs and the key sectors all registered sizable gains. While the tech sector was the clear leader of the rally, services and industrial goods also shined, and even the relatively weak consumer-related issues gained more than 1% on average. Financials also staged an encouraging rebound, but since Treasury yields settled down just above their recent lows, large-cap banks will likely remain under pressure. Besides Treasuries, gold also remained strong today, so while today’s price action was bullish, the main safe-haven assets are still favored by a large number of investors.
The tensions between the Trump administration and the Federal Reserve continue to escalate, and as the elections draw closer, the debate regarding the Central Bank’s monetary policies could get even more intense. President Trump would like to see an aggressive rate cut cycle, and today he also suggested that the Fed should stop quantitative tightening to further ease financial conditions. According to the Treasury market, the Fed will cut rates in September and October, but we think that unless the global economic slowdown accelerates, the Fed will keep on reducing its balance sheet.
Today’s rally, which erased most of this week’s losses as far as the major indices are concerned, was especially impressive due to the lack of positive catalysts. While the People’s Bank of China (PBOC) fixed the yuan’s exchange rate higher-than-expected overnight, the negotiations between the U.S. and China still seem to be stuck. The bounce can be partially explained by the decline in Treasury yields, but the fact that investors continue to shrug off the effects of the slowdown in Europe and China is great news for bulls.
The Producer Price Index (PPI) will be in focus tomorrow in terms of economic releases, but even though the key inflation indicators were very important for the market in the first half of the year, we don’t expect the PPI report to have a major impact on prices in the current environment. The core PPI is expected to tick lower to 0.2%, despite the effects of the trade tariffs, while the less reliable headline measure is forecast to increase to 0.2%.
Technical Corner
The major indices staged a strong bounce off Monday’s lows, especially if we consider the price levels hit in after-hours trading, but the short-term trend remains bearish, even as the rising long-term trend is in no danger according to the most reliable trend indicators. The benchmarks are well above their rising 200-day moving averages of 7,558 for the Nasdaq, 2,792 for the S&P 500, and 25,565 for the Dow, but the industrial average remains slightly below its 50-day moving averages of 26,526, even though the S&P 500 and the Nasdaq are above their short-term averages of 2,935 and 7,992 respectively.
Most of the experienced traders agree that the best way to judge the health of a trend is to closely follow the leaders of the move. Microsoft (MSFT) has arguably been the strongest among the tech giants in recent months, and this week, the stock remained relatively strong from a technical perspective. Although Microsoft dipped below its steeply rising 50-day moving average on Monday, it’s now clearly above its short-term trend indicator, looking ready to challenge its all-time high. The pullback that started last week might still continue, but as the leaders of the rally continue to show strength, the rising long-term trend remains stable. Stay tuned!
