Markets Seeing Gains For The Week, Rally Mode?

Are We In Rally Mode?

Both the S&P 500 and the Nasdaq have posted gains for the week with the S&P 500 now above its 21-day moving average. A move above this moving average in early July this year led to a 6-week rally.

As for the Nasdaq, the longer-term, weekly chart looks promising as well, as the Stochastics are currently in an oversold position (below 20) and headed higher. As shown in the chart below, they were in a similar position at the end of the 2018 and 2020 bear markets.

Weekly Chart of Nasdaq Composite

Oversold Stochastics on a weekly chart also preceded this year’s 3-week February to March rally as well as the lengthier June to August rally. 

While the currently oversold position of the Stochastics on the weekly chart of the Nasdaq as well as a break above the 21-day moving average on the S&P 500 would have us hopeful for at least a near-term rally, we’re currently missing a key ingredient. 

Interest Rates

That is, a decline in interest rates. During 2018 and 2020 as well as each of the rally periods this year, interest rates were declining. 

As many of you may know, rising interest rates are a negative for stocks – particularly Growth stocks – as the value of future earnings are reduced. Until we see interest rates peak, we anticipate a continued difficult period for the markets. 

Daily Chart of TNX

Federal Reserve officials have made it clear that they will not slow down their aggressive campaign to raise interest rates until we see reports of inflation trending much lower.

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Inflation Data

Last week, key inflation data by way of the Producer Price Index (PPI) and Consumer Price Index (CPI) confirmed that inflation remains very much in place. In fact, it’s currently trending at a 40-year high. 

Core CPI, which strips out volatile energy and food costs and is most closely watched by the Federal Reserve, came in well above estimates as well last week.

In the end, while the broader markets are giving signs of a possible near-term rally, the current rising interest rate backdrop will stall any rally attempt and most likely lead to more downside for these markets.

Mary Ellen McGonagle

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