Weekly Trader's Outlook

If you read last week's blog by my colleague Jim Ferraioli, you might recall that he had an overall "modestly cautious" stance on stocks this week, highlighting relatively bearish seasonality and heightened uncertainty around Iran and long-term Treasury yields. While the S&P 500 (SPX) and Nasdaq Composite ($COMP) are on track for modest gains, the S&P 500 Equal Weight and Russell 2000 are on track for modest losses. Part of the reason for this bifurcation was due to relative outperformance in mega-cap tech, driven by strong long-term guidance from AI chip darling Nvidia. While Nvidia's revenue and margin guidance for the current quarter may not have been strong enough to satisfy investor expectations, on the post-earnings conference call NVDA CFO Colette Kress said that fiscal 2028 revenue is expected to increase 70% year-over-year, which was well above the 45-50% analysts were modeling. Additionally, CRM software maker Salesforce.com (CRM) delivered strong results and guidance which helped validate the "AI enablement" theme for the software sector which helped lift overall investor sentiment towards the AI trade. Overall, the weekly range on the major indices, along with total daily volume, was relatively tight and light, which is common during the summertime. Most of the week it felt like traders were awaiting Nvidia results, and then this morning's Jackson Hole speech. Warsh delivered a slightly hawkish speech, as evidenced by the move up in rate hike probabilities, but markets have been taking it in stride (more on this in the "Economic Data, Rates & the Fed" section below).

Regarding the Iran conflict, earlier this week the U.S. Department of the Treasury launched an economic campaign against the Islamic Republic of Iran and its enablers, dubbed "Operation Economic Outcast". The objective, according to the department, is to "sever every economic lifeline that sustains this tyrannical regime until Tehran stands alone". Earlier this morning, there was a report that Iran's access to UAE banks have been targeted under Operation Economic Outcast. For reference, October Futures on WTI crude are down 4.27% this week, last seen trading at $83.30/barrel.

The Q2 earnings season is essentially finished, as 485 of the S&P 500 companies have reported results. From the companies we've heard from, 69% have beat estimates on the top line while 88% have beat on the bottom line. What has been noteworthy is EPS growth, which is tracking at 52% and revenue growth at 14.99%. When excluding one-time investment gains from mega-cap tech, the EPS growth rate for the S&P 500 is tracking 26-29%, which is still exceptionally strong.

At the time of this writing (2:25 PM ET) stocks are modestly lower across the board, though off the lows of the session (DJI - 48, SPX - 22, $COMP - 142, RUT - 36), as investors digest the Warsh Speech and implications on future monetary policy. I don't believe investors are too concerned about a rate hike in September (should that occur) but perhaps may be more sensitive to any ripples it could generate in the global bond market. Perhaps the good bond news is that 30-year Treasury yields are down roughly 10 basis points from last week's cycle high of 5.31%, mostly driven by the announcement of a buyback program by the U.S. Treasury. Next week there a couple of potential market moving catalysts traders may want to consider: On Monday & Tuesday there will be a G20 Finance meeting, on Tuesday & Wednesday there will be a G20 Innovation Ministerial meeting (which includes keynotes speeches from NVDA CEO Jensen Huang and OpenAI CEO Sam Altman) and on Friday we will get the monthly jobs report. Additionally, some traders may be coming back from vacation (though many wait until after Labor Day), which could result in some adjustments to positioning and/or generate a lift in overall trade volume. Stocks are also entering the month of September, which is historically the worst performing month for the S&P 500 index. Lastly, the technicals on the S&P 500 Equal Weight and Russell 2000 saw some modest degradation this week (more on this in the "Technical Take" section below). Therefore, I'm going to provide an overall "Cautious" outlook on stocks next week. What could challenge my forecast? It's possible that markets see a "bounce back" from today's Jackson Hole speech, which isn't uncommon the day after the press conference from an FOMC meeting. Also, the Nonfarm Payrolls reports have been weak recently, and if next Friday's report is soft, this could ease rate hike concerns and translate into a bullish move for stocks.

• Monday (8/31): G20 Finance Ministers and Central Bank Governors Meeting (August 31st – September 1st).
• Tuesday (9/1): Construction Spending, ISM Manufacturing Index; G20 Innovation Ministerial (September 1st – September 2nd)
• Wednesday (9/2): ADP Employment Change, Business Inventories, EIA Crude Oil Inventories, Factory Orders, MBA Mortgage Applications Index
• Thursday (9/3): Continuing Claims, EIA Natural Gas Inventories, Initial Claims, ISM Non-Manufacturing, Productivity-Revised, Trade Balance, Unit Labor Costs
• Friday (9/4): Average Hourly Earnings, Average Workweek, Nonfarm Payrolls, Unemployment Rate

• Monday (8/31): Science Applications International Corp. (SAIC), So-Young International Inc. (SY)
• Tuesday (9/1): Credo Technology Group Holding Ltd. (CRDO), Dell Technologies Inc. (DELL), GitLab Inc. (GTLB), Medtronic PLC (MDT), MiniMed Group Inc. (MMED), MongoDB Inc. (MDB), NIO Inc. (NIO), Palo Alto Networks Inc. (PANW)
• Wednesday (9/2): Aerovironment Inc. (AVAV), Argan Inc. (AGX), Broadcom Inc. (AVGO), Brown-Forman Corp. (BF/B), Five Below Inc. (FIVE), Forgent Power Solutions Inc. (FPS), Fuelcell Energy Inc. (FCEL), G-III Apparel Group (GIII), Hewlett Packard Enterprise Company (HPE), NetApp Inc. (NTAP), PVH Corp. (PVH), Snowflake Inc. (SNOW)
• Thursday (9/3): Ambarella Inc. (AMBA), Asana Inc. (ASAN), Campbell's Co. (CPB), Ciena Corp. (CIEN), Copart Inc. (CPRT), DocuSign Inc. (DOCU), Guideware Software Inc. (GWRE), Lululemon Athletica Inc. (LULU), The Toro Company (TTC), VinFast Auto Ltd. (VFS), Samsara Inc. (IOT), Zscaler Inc. (ZS)
• Friday (9/4): Children's Place Inc. (PLCE), Knot Offshore Partners LP (KNOP)

There was a healthy dose of economic data this week, which was highlighted by the annual Jackson Hole Economic Symposium speech from Kevin Warsh, and the monthly PCE report. Regarding the Jackson Hole speech earlier this morning, Warsh leaned hawkish and reiterated the Fed's commitment to price stability, which moved rate hike probabilities higher. Earlier in the week, the monthly PCE Prices report was essentially in-line, but with the annual core rate registering 3.3% it is clear that inflation remains elevated relative to the Fed's mandate. Here's a breakdown of the reports:

• Jackson Hole Economic Symposium: Kevin Warsh's Jackson Hole speech didn't contain a lot of surprises, but markets interpreted the tone as net hawkish given the post-speech reaction in the rate hike probabilities. Here is a high-level summary of Warsh's message: It's the Fed's job to deliver stable prices and our focus is on prices; there is not enough evidence that price stability has been achieved; more than half the categories in the PCE basket showed 3% or higher inflation; I would be hard pressed to describe the broad financial activity as "restrictive"; I'm impressed by the overall strength of the economy; a quieter Fed is better able to meet its objectives.
• PCE Prices: The July headline Personal Consumption Expenditures Prices Index increased 0.2% from the prior month, which puts the annual headline increase at 3.7% (both 0.1% above the Dow Jones consensus estimate). On a core basis, July PCE Prices increased 0.2%, bringing the annual core increase to +3.3% (both in-line with estimates).
• Q2 GDP – Second Estimate: Gross Domestic Product rose 1.5% in the second quarter, according to the second reading from the U.S. Bureau of Economic Analysis. The estimate was unrevised from the Advanced Reading, below the +1.7% expected and down from +2.1% in Q1. Contributors to the real increase in Q2 GDP were increases in consumer spending, exports and investment, partially offset by a decrease in government spending and imports.
• Personal Income: 0.4% vs. 0.3% expected.
• Personal Spending: 0.2% vs. 0.1% expected.
• Durable Goods Orders: 1.1% vs. 1.0% est.
• Durable Goods ex-transportation: 0.4% vs. 0.6% est.
• New Home Sales: 607K vs. 606K.
• Consumer Confidence: 89.4 vs. 91.2 est.
• University of Michigan Consumer Sentiment – Final: 51.7 vs. 51.2 est.
• Chicago PMI: The Chicago Business Barometer sank to 47.1 in August, which was down from 57.6 in July and well below the 57.0 economists had expected. Any figure below 50 indicates economic contraction.
• EIA Crude Oil Inventories: +0.10M barrels.
• EIA Natural Gas Inventories: +15 bcf.
• Initial Jobless Claims: Initial applications for US jobless benefits decreased 4K from last week's (upwardly revised) 207K to 203K. Continuing Claims decreased by 18K from the prior week to a seasonally adjusted 1.778M.
• The Atlanta Fed's GDPNow initial "nowcast" for Q3 GDP was revised down to 4.6% on Wednesday from 4.0% last week, primarily driven by an uptick in consumer spending forecasts.

U.S. Treasury yields moved higher on the front end of the curve, primarily driven by today's Speech from Warsh, but pulled back some on the long end of the curve, which resulted in some flattening of the yield curve. Compared to last Friday, 2-year Treasury yields are up ~11 basis points (4.341% vs. 4.23%), 10-year yields eased ~1 basis points (4.728% vs. 4.738%) while 30-year yields decreased ~5 basis points (5.21% vs. 5.266%).

Market expectations around a potential rate hike from the Federal Reserve took a hawkish move higher following Kevin Warsh's Jackson Hole speech. Per Bloomberg, the probability of a Fed rate hike at the September FOMC is now up to 58% today from 35% earlier today before the speech, and October moved up to 88% from 64%. The first theoretical 100% probability of a rate hike remains at the December FOMC meeting.

The S&P 500 Equal Weight (SPXEW) is on track to be down roughly 0.5% this week and some modest signs of near-term technical deterioration are showing up on the charts. First, the index is on track to close below its 20-day Simple Moving Average (SMA), which would be the first time since July 24th. Next, the Relative Strength Index (RSI), a measure of momentum, is down to its lowest level this month. Lastly, the MACD registered a bearish cross back on Augus 20th and the faster-moving average and remains below the slower moving average. Therefore, the near-term technical snapshot has shifted modestly in favor of the bears.

Near-term technical translation: moderately bearish
Intermediate-term technical translation: bullish (intermediate uptrend still intact)

The chart on the Russell 2000 index (RUT) looks similar to the SPXEW on a near-term basis. Meaning, momentum has been waning recently, and the index is on track to close below a key near-term moving average for the first time this month – the 50-day SMA rather than the 20-day SMA. Therefore, on a near-term basis, the technicals on the RUT also took a bearish shift this week.

Near-term technical translation: moderately bearish

The Bitwise 10 Large Crypto Index is up 2% since last Friday, with bitcoin up 2% and ether up 2% at the time of writing. Following last week's short squeeze, an analysis of the crypto market structure can help put these events into perspective. The key concept here is market fragility. Fragility is a market state in which unexpected catalysts can cause cascading stress. In crypto markets, this is often when unexpected news drives cascading liquidations in levered futures positions. Last week's short squeeze resulted in a violent move, lifting bitcoin 24% higher, and liquidating nearly $13 billion in levered short positions since the initial squeeze began last Wednesday, according to data from Glassnode. The same cascading liquidations drove the latest bear market. On October 10th, $2.6 billion in long futures positions were liquidated after 100% tariffs on China were announced. Additional stress may have stemmed from the depegging of an algorithmic stablecoin following an oracle issue on the world's largest crypto exchange. This led to several weeks of cascading liquidations of levered long positions.

A multivariate regression analysis on the drivers of bitcoin's daily price moves suggested that long and short liquidations can explain nearly 50% of bitcoin's daily price moves, on average. The liquidations are not the drivers of price, but they amplify price movements. Understanding market fragility can help put the likelihood of liquidations in either direction into perspective. Historically, short squeezes have often occurred when spot supply is leaving exchanges and the leverage structure becomes exposed, with more shorts sitting closer to spot than longs. A trigger ultimately causes a sharp rally, forcing short positions to unwind into thin supply, which accelerates the move in prices upward. Looking at short squeezes over the past few years, several on-chain indicators provide insight into a fragile market structure ahead of the events that trigger the squeezes. These indicators include: 1) exchange balances; 2) perpetual futures funding rates; 3) short vs long futures imbalance; 4) sentiment; and 5) low realized volatility. These metrics can be combined to create a short-biased market fragility signal.

Long flushes have historically occurred when spot supply is building and long-side leverage is stacked closer to spot than short-side leverage. These events have historically seen investors bullishly positioned in futures markets, measured by elevated funding rates and high levels of open interest. A sharp decline forces that positioning to unwind into rising supply, which accelerates the move. A long-biased market fragility indicator can help manage downside risk.

Market fragility is only a state; a squeeze or flush still requires a trigger. In the case of the latest short squeeze, the market was in a state of short-biased fragility, with announcements related to treasury buybacks, proposed crypto regulatory initiatives and a meeting between crypto industry leaders and the White House all occurring on the same day. Last week's squeeze appears to have shifted futures positioning toward a more balanced state. While longs are clustered closer to spot, the estimated value of long liquidation fuel is about $2.5 billion within 10% of spot, compared to over $10 billion of shorts within 10% of spot. That said, it would take a large move to put the shorts at risk of liquidation, and investors may be less likely to get caught off guard this time around. Ultimately, what should investors be aware of given this recent repositioning of futures market structure?

As investors react to Chair Warsh's Jackson Hole Symposium remarks, bitcoin and the broader crypto market appear to be in a less fragile state than a week ago in terms of leverage, which may blunt the impact of reactions to Chair Warsh's comments and near-term macroeconomic data releases.

The Bloomberg chart below shows the current % of members within the S&P 500 (SPX), Nasdaq Composite (CCMP) & Russell 2000 (RTY) that are trading above their respective 200-day Simple Moving Averages (SMA). In short, the SPX and CCMP are on track to be up on the week, while the RUT is essentially flat. Compared to two Friday's ago (August 14th), the SPX (white line) breadth has dropped to 71.00% from 75.20%, the CCMP (blue line) is essentially flat at 49.10% from 49.36%, and the RUT (red line) eased to 65.32% from 68.37% (all week-over-week).

Market breadth attempts to capture individual stock participation within an overall index, which can help convey underlying strength or weakness of a move or trend. Typically, broader participation suggests healthy investor sentiment and supportive technicals. There are many data points to help convey market breadth, such as advancing vs. declining issues, % of stocks within an index that are above or below a longer-term moving average or new highs vs. new lows.

This Week's Notable 52-week Highs (66 today): Airbnb Inc. (ABNB + $3.27 to $187.67), Amgen Inc. (AMGN - $4.37 to $432.67), CarMax Inc. (KMX + $0.20 to $62.84), Expedia Group Inc. (EXPE + $4.08 to $323.00), Freeport-McMoRan Inc. (FCX - $0.44 to $77.98), Visa Inc. (V + $3.12 to $381.78)

This Week's Notable 52-week Lows (65 today): Aptiv PLC (APTV - $0.36 to $45.08), BWX Technologies Inc. (BWXT - $0.70 to $155.15), Dick's Sporting Goods Inc. (DKS + $1.55 to $133.32), L3 Harris Technologies Inc. (LHX + $2.59 to $264.57), Nike Inc. (NKE + $0.52 to $38.96), On Holdings AG (ONON + $0.41 to $29.36)