Introduction
On Friday, the stock market saw a significant uptick, with the Dow Jones Industrial Average setting a new record as investors closed a turbulent month on a positive note. This came as market participants closely monitored crucial inflation data that the Federal Reserve carefully observes.
Weekly Market Overview
The Dow, comprising 30 stocks, surged by 228.03 points, or 0.55%, ended last week at 41,563.08. The blue-chip index reached a new all-time high in the final minutes of the session and closed at a record level once again. The S&P 500 also advanced, climbing 1.01% to close the past week at 5,648.40, while the Nasdaq Composite, known for its focus on technology stocks, increased by 1.13%, finishing the week at 17,713.62.
In July, the personal consumption expenditures price index—the Federal Reserve's preferred measure of inflation—rose by 0.2% on a monthly basis and 2.5% year-over-year. These figures matched the expectations of economists surveyed by Dow Jones. When excluding food and energy, the index also saw a 0.2% monthly increase. This inflation metric remains a key consideration for the Federal Reserve, potentially influencing their decision on interest rates in September.
Powell’s Speech: A Dovish Shift?
Michael Green, Chief Strategist at Simplify Asset Management, commented on Friday’s market behavior, noting that "the equity markets are acting as though everything is stable." He pointed out that there is growing evidence of a soft landing and less indication that the Federal Reserve will aggressively cut rates.
Market Reactions: Tech Stocks Lead the Charge
As August came to a close, the S&P 500 posted a 2.3% gain for the month, with the Dow rising nearly 1.8%. The Nasdaq Composite managed a 0.7% increase during the same period. This marks the fourth consecutive month of gains for the S&P 500, driven by strong performances in consumer staples, real estate, and health care sectors. Earlier in the month, the markets experienced a sharp decline, with the S&P 500 dropping by as much as 7.3% before rebounding. The Dow and Nasdaq also faced significant losses, falling as much as 5.4% and 10.7%, respectively, at their lowest points.
Expert Opinions on the Fed’s Path Forward
Michael Green’s observation that the equity markets appear stable despite earlier volatility suggests a belief that the Federal Reserve may not need to take drastic action in the near term. However, with inflation data remaining a critical factor, the Federal Reserve's decisions in the coming months will be closely watched.
Sector Highlights: Earnings Season and Market Trends
The second-quarter earnings season is nearly complete, with only seven S&P 500 companies left to report. According to LSEG, Nvidia's recent performance pushed the S&P 500’s earnings growth rate to 13% for the quarter, the strongest since Q4 2021. This surpassed the initial expectation of 10.6% growth. The tech, financial, and health care sectors led with over 20% earnings growth, while materials and real estate saw contractions.
Shares of Super Micro Computer, a key player in AI servers, have dropped by 38% in August, marking its worst month on record. The company faced volatility, exacerbated by a delay in its annual filing and a short position by Hindenburg Research. The stock plummeted 19% in one session, leading to a 29% decline for the week and positioning it as the worst performer in the S&P 500 for the month.
Outlook for the S&P 500
Stronger consumer spending has led to an upward revision in the third-quarter economic growth outlook. Goldman Sachs raised its GDP estimate for Q3 to 2.7%, while the Atlanta Federal Reserve's GDPNow tracker increased its forecast to 2.5%, anticipating a 3.8% rise in PCE growth for the quarter.
Play of the Week: $TGT (Target)
Earnings Gap Downside Play: $TGT is moving towards the downside, entering a large earnings gap. The downward move began on Wednesday and has continued through the end of last week. A slow creep down to fill this gap is expected, with small bounces along the way.
Primary Entry: Look for a push into the $156 area to initiate a short position.
Upside Targets:
First Target: $151-$152 (potential bounce area) Second Target: $148 Third Target: $145.70 (gap fill target) Entry Point: Monitor for a push into the $156 area, and look for confirmation signals such as a bearish continuation before entering short positions.
Exit Points:
Consider taking profits around the $151-$152 area if small bounces occur. If downside momentum continues, target additional exits at $148 and the gap fill at $145.70. Stop-Loss: Set a stop-loss just above the $156 level to manage upside risk. Reassess the position if $TGT shows strength and moves above this level.
Additional Considerations: Be aware of broader market conditions, particularly in the retail sector, as they could impact $TGT's movement and the effectiveness of this strategy. Before making any investment decisions, conduct thorough research and consider consulting with a financial advisor. This analysis is based on previous price action, which does not indicate future price action.
Conclusion
Friday’s stock market rally, driven by inflation data and strong performances in key sectors, highlights a cautiously optimistic market environment as investors look to September. With the Federal Reserve keeping a close eye on inflation, future rate decisions remain pivotal. As investors continue to navigate these changes, stay up to date with our free newsletter & join our Discord server with free alerts and more here!