August, typically a volatile month for markets, has begun. Don't be unnerved by any sudden moves -- up or down. Just August being August. The last four years, the S&P 500 gained in 2012 and 2014 - up 2.2 percent and 4.2 percent, respectively. Conversely, the index lost ground in 2011 and 2013 - dropping 4 percent and 4.1 percent. At first glance? We expect this August to be no different. So buckle up.
The short-term moving averages -- the nine-day exponential moving average, the 20-day EMA and the 50-day moving average -- are bunched around the 2,100 level on the S&P 500. Which sits near the current index price. While we could see a two to four percent move in the index these next few weeks, there remains no clear direction. The technical indicators, like the McLellan Oscillator and the Summation Indexes, sit in neutral position. Giving no clear edge to either side -- up or down.
One area on which we continue to be bullish? Europe. As the Greek bailout continues to clarify, and Europe continues its "U.S.-style easing" process, European stocks will benefit. And unlike their U.S. counterparts, there's no question European equity valuations. They remain much cheaper than those in the U.S. With interest rates set to remain near zero for some time, European stocks and real estate will strain to trend higher. So proving the point, what doesn't kill you makes you stronger.
Typically, bull markets begin with cheap valuations and an increase in liquidity. As investors embrace the bullish reality, momentum increases until frothy valuations appear. Bulls struggle to justify such heady multiples, and liquidity dissipates. Which stunts momentum, and give way to the next bear cycle.
The current bull market, which began in early 2009, has seen the S&P 500 triple in value. Valuations were very compelling back then. Coupled with the Federal Reserves huge liquidity injection. Investors saw a prime opportunity to speculate. Momentum began in earnest in summer 2009. And markets have climbed higher since.
Today, one could argue that U.S. valuations look a bit stretched, as the S&P 500 trades at a 25 percent premium to its historical median price-to-sales ratio. Further, the Fed will soon begin to withdraw liquidity. Raising interest rates for the first time in seven years.
Currently, the public waits with baited breadth as the Fed interminably mulls over its rake-hike decision. Concurrently, only 35 percent of NYSE stocks trade above their respective 200-day moving averages. Already sinking into their own bearish cycles. The NYSE advance-decline line, representing the difference between stocks moving higher versus stocks moving lower, is at its lowest level since 2010. This type of narrowing breadth has preceded market beatdowns in the past. Vigilance is warranted.
Further, the lack of wage growth has also been disconcerting. Wage inflation - the last mission piece of the economic puzzle - seemed just around the bend. The unemployment rate has fallen to 5.3 percent. Surveys show that businesses have prepared for higher wages. And as labor markets tighten, companies have had a more difficult time finding workers. Yet, wage inflation remains razor thin. With the ECI (one of the Fed's favorite measures of economic growth) measuring at 0.2 percent growth quarter-over-quarter. It's weakest growth rate in the 33-year history of the report. Wages and salaries grew at a meager 2.1 percent annual rate. Even as Deutsche Bank survey data shows that companies have been planning to raise worker compensation at what should equal a 3 percent annual growth rate.
Perplexing. As onlookers question whether the slowdown will prevent the Fed from moving ahead with a September rate hike. Which resulted inFriday's pullback. As investors fear that the Fed is set on raising rates in September, economic data be damned.
Q2 earnings season continues. With 354 S&P 500 companies having reported, the blended earnings growth rate is forecast at -1.3 percent. Which would represent the first profitability decline since 2012. And the largest such decline since 2009. Which explains why markets have been so sluggish.
Bottom line? Bulls briefly reclaimed the driver's seat last week. But, yet again failed to push markets above the upper end of the current trading range. Bears now have a shot to wreak havoc. As seasonality, slowing earnings and anxiety over a pending rate hike send investor tensions higher. Stay focused.
The Greek agreement remains in place, for now... Earnings reports have, overall, been solid... Earnings stock reaction has been positive... Durable goods orders beat expectations... Chicago PMI was strong... Sentiment is negative, a bullish contrarian indicator...
Consumer confidence disappointed... The House adjourned for five weeks, leaving much unfinished business... Pending home sales disappointed... Q2 GDP was slightly lower than expected... The employment cost index showed only a small increase, leaving wage growth and inflation in limbo...
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Major markets finished higher last week. The DJIA rose 0.69%, the S&P 500 gained 1.16%, and the Nasdaq added 0.78%. Small cap stocks rose 1.03%. And the 10-year Treasury bond yield gained 8 basis points to 2.18%. Gold lost $3.23 per ounce, or 0.29%.
Check out JP Morgan's weekly recap here.