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'A Clear Break With Prevailing Policy': Stock Market Update For The Week Ahead

Renato Capelj

The Last Week In A Nutshell

What Happened: Last week ended positive, with broad gains in all S&P 500 sectors.

Remember This: “Some data suggests consumer health has started to improve,” said Lindsey Bell, chief investment strategist at Ally Financial Inc (NYSE: ALLY)-owned Ally Invest.

“A consumer who’s still willing to spend on certain discretionary items has emerged. And a company that offers that consumer what they want, where they want (and feel safe), may be seeing its stock price benefit.”

Pictured: Profile chart of the S&P 500 Micro E-mini Futures.

Technical: Broad-market equity indices ended the week higher, with the S&P 500 establishing a new all-time high on broad gains from all sectors.

Recapping Last Week's Action: Monday’s higher open on the FDA’s approval for emergency use of antibody-rich plasma on COVID-19 patients was followed by a balanced, low-volume session that migrated value higher.

On Tuesday, the market continued squeezing overnight on positive trade news and supportive delta before correcting inventory down to a prior session low-volume area and making a failed attempt at the overnight high.

Wednesday’s U.S. session resolved Tuesday’s overnight weak high as investors flocked to momentum. The tone continued through Friday as the Federal Reserve’s policy shift on inflation bolstered gains in all 11 of the S&P 500 sectors.

Overall, in light of the short-term, momentum-driven activity and poor structure on both sides of the market, the risks for a near-term correction have increased. That said, heavily-weighted index constituents are still in an uptrend and all sectors saw gains.

As of now, the path of least resistance is still up. If the momentum were to fade, there’s the potential for a fast-moving correction of the poor structure left behind by the recent anxiety-driven activity.

Scroll to the bottom of this story to view non-profile charts.

Fundamental: Federal Reserve Chair Jerome Powell unveiled a strategy that targets an average rate of inflation of 2%.

“Whereas previously, the Fed would be willing to hike interest rates as the labour market approached estimates of maximum employment, Powell has made it clear that uncertainty around these estimates mean that they will not be relied upon as much in the future," Ranko Berich, head of market analysis at Monex Europe, said in a statement on the development.

"Instead, Powell stated ‘employment can run at or above real-time estimates of its maximum level without causing concern, unless accompanied by signs of unwanted increases in inflation.’ This is a clear break with prevailing policy wisdom going back as far as the 1980s — its significance is difficult to overstate.”

The development comes after the Fed’s monetary policy, after the last financial crisis, failed to stimulate economic activity sufficiently to lift inflation over 2%.

As a result, this new shift means the Federal Reserve will tolerate hot inflation and allow employment to drop below inflationary levels.

Key Events: Dallas Fed Manufacturing Business Index; CoreLogic Home Price Index; ISM Manufacturing and Nonmanufacturing Reports; Vehicle Sales; ADP National Employment; Challenger Layoffs; Jobless Claims; International Trade and Trade Balance; Non-farm Payrolls.

Recent News: Economic recovery remains tenuous as pandemic fear persists.

  • Banks eye layoffs as short-term crisis ends, long-term costs emerge.

  • August surge in corporate bond issuance mostly re-financed old debt.

  • Per Bank of America Corp (NYSE: BAC), margin debt broke out, and that’s bullish.

  • European banks suffer more than U.S. peers in the coronavirus crisis.

  • BlackRock Inc Investment Institute’s (NYSE: BLK) 2020 midyear outlook.

  • Energy and consumer-dependent industries see most downgrades.

  • Retail activity in the options market is up 75% over the last 18 months.

  • TTM loan default rate climbs for eight straight months, retail hits 19%.

  • Walmart Inc (NYSE: WMT) joins Microsoft Corporation (NASDAQ: MSFT) TikTok bid.

  • Boeing Co (NYSE: BA) finds flaws in fuselage of Dreamliner; eight aircraft affected.

  • Venture funds are raising more than ever in 2020, and spending at a good pace too.

  • Federal Reserve targets average inflation, signaling it will tolerate an overshoot.

  • NVIDIA Corporation (NASDAQ: NVDA) end markets boost revenue, a credit positive.

  • American Express Company’s (NYSE: AXP) acquisition of Kabbage, credit positive.

  • China moves ahead with its version of a central bank digital currency, Fed follows.

  • The PMI report shows V-shaped recovery in services and manufacturing sectors.

  • Goldman Sachs Group Inc (NYSE: GS) said 25% layoffs may be permanent.

  • Salesforce.com Inc (NYSE: CRM), Amgen Inc (NASDAQ: AMGN), and Honeywell International Inc (NYSE: HON) to join Dow index Aug. 31.

  • Best Buy Co Inc (NYSE: BBY) warns of slow sales after the work-from-home boom.

  • Beyond Meat Inc (NASDAQ: BYND) begins direct online sales of plant-based patties.

  • Gold closely linked to liquidity; the more money available, the higher gold trades.

  • Amazon.com Inc (NASDAQ: AMZN) launched its first fitness band.

  • Facebook Inc (NASDAQ: FB) to pay more than $110 million in back taxes in France.

  • American Airlines Group Inc (NASDAQ: AAL) plans to cut 19,000 jobs in October.

  • Uber Technologies Inc (NYSE: UBER) plans to expand its services across Quebec.

  • Amazon.com Inc (NASDAQ: AMZN) faces antitrust challenges from Indian sellers.

  • U.S. and China officials reaffirm commitment to Phase 1 trade deal in phone call.

Key Metrics

  • Sentiment: 33.1% Bullish, 28.3% Neutral, 39.6% Bearish as of Aug. 28. 

  • Gamma Exposure: (Trending Lower) 4,263,904,049 as of Aug. 28. 

  • Dark Pool Index: (Trending Lower) 41% as of Aug. 28. 

Product Snapshot 

S&P 500 Micro E-mini Futures (ES) | SPDR S&P 500 ETF Trust (NYSE: SPY)

Nasdaq-100 Micro E-mini Futures (NQ) | PowerShares QQQ Trust (NASDAQ: QQQ)

Russell 2000 E-mini Futures (RTY) | iShares Russell 2000 Index (NYSE: IWM)

Gold Futures (GC) | SPDR Gold Trust (NYSE: GLD)

Crude Oil (CL) | United States Oil Fund LP (NYSE: USO) | Invesco DB Oil Fund (NYSE: DBO) | United States 12 Month Oil Fund (NYSE: USL)

Treasury Bonds (ZB) | iShares 20+ Year Treasury Bond (NASDAQ: TLT)

Photo of Federal Reserve Chair Jerome Powell via Wikimedia. 

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