Talking Points: August 19, 2022

Internal market momentum cannot and should not be ignored.

Unlike the rallies earlier this year, this latest rally is showing broad participation and real momentum.

• Over 90% of S&P 500 stocks are trading above their 50-day moving average. In contrast, during March’s growth rally only 74% of stocks were trading at those levels and that level was reached for only a single trade day. We’ve had over 90% now for 4 straight trade days.
• The S&P 500 recovered over 50% of its losses last Friday (the “retracement” we discussed last week). Equity returns 2 and 3 months out following such recoveries have been positive in almost all cases. Not a guarantee but a decent signal of forward momentum.
• Breadth has improved: the percentage of S&P 500 stocks hitting new 20-day highs reached over 55%. This is a bullish signal that’s only occurred 28 other times since the 1970s. The last time it happened recently was May 2020.
• It is impossible to say whether this is another dead-cat bounce or a new bull breakout, though the momentum indicates further upside potential in the short term (see charts below).

The stock market is pricing in perfection: inflation gradually recedes, the Fed eventually pivots, and the economy lands softly.

• Pricing for perfection means extreme fragility: any negative inflation data point has the potential to burst this bubble of optimism.

The Fed’s July meeting minutes revealed that they’re happy about July’s inflation moderating though they remain committed to stamping out inflation.

• They will be data-dependent going forward and gave no hint of a pivot.
• The Fed saw “little evidence to date that inflation pressures were subsiding.” More hikes coming.

Next Friday we get July’s Personal Consumption Expenditures data (the Fed’s preferred measure of inflation).