Originally we expected the market to correct all the way into October, where it is a typical place for a seasonal low. We had two major events last week. First, the Nvidia Q2 earnings report was a blowout quarter, but the market didn’t jump as it was under the Fed’s shadow. Secondly, the Fed Jackson Hole speech was the usual data dependent muddy rambling, the market reaction was muted. These reactions led us to suspect that the correction low would have been made already on 8/18/2023.
The 10-year treasury yield could be forming a double top against the October 2022 high, when the equities bottomed in October 2022. The XLP/SPY (consumer discretionary/S&P 500) ratio is not showing risk aversion, meaning the uptrend started in October 2022 is still intact. In order for the 8/18/23 bottom to be confirmed, we need a follow thru day that has a gain of at least 1.25% with a larger trading volume than the previous day. This follow thru day is preferably to occur 4-7 trading days after the 8/18/23 low. It has been 5 trading days since the 8/18/23 low. All three major indices should rally on same the follow thru day. It is an invalid follow thru day if the NASDAQ rallies 1.25% with higher volume but the DOW is in red.
Next week we will have a slew of jobs data and PCE index releases. Any one of those days could be the potential follow thru day if the 8/18 low is held. The DOW made a new low last Friday. So the DOW shouldn’t make a new low next week. If the DOW makes a new low next week, then all is invalidated.
If indeed the market is able to rally from the 8/18/23 low, the bears would be even more desperate because there isn’t absolute any good fundamental reasons for the market to rally. The credit condition is worsening. The economy is weakening. The banks, especially the regional banks, the commercial real estate sector, the consumers and the U.S. government are all suffering from the higher interest rates. But perhaps the suffering is not enough to take down the economy yet. The money on the sideline is plenty and everyone agrees that the AI wave will be the next catalyst for a new bull market.
We are still of the opinion that the October 2022 low is not the start of a new bull market. Rather the rally from October 2022 low is a safe haven seeking rally, the last leg rally of the 4-year cycle that started in March 2020.
Below is the NASDAQ daily chart.
You can see that the 08/18/23 low hit the 38.2% retracement of the weekly cycle high to low correction (weekly cycle low 3/13/23 to weekly cycle high 7/18/23). If indeed the 8/18/23 low is the weekly cycle low, then it is a very bullish weekly cycle because the correction is very shallow.
