Dow: Down but not out

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NFP misses, but services remain strong

Plenty to digest late last week with the US Non-Farm Payrolls (NFP) taking the bulk of the attention. The NFP showed growth of 187K for July, which was a slight miss and involved lower revisions for June and May, both under 50K.

Other labor market data revealed three key points:

1. the unemployment rate dropping to 3.5%, thanks to stronger gains of 268K for the household survey, but with a notable drop in full-time jobs and a rise in part-time
2. wages showing month-on-month (m/m) growth of 0.4%, slightly above expectations, with the year-on-year (y/y) print remaining at 4.4%
3. the labor force participation rate remaining unchanged at 62.6%, while the employment-population ratio rose to 60.4%.

Data from the previous day showed that the services sector is still in expansion, with ISM (Institute for Supply Management) at 52.7 and S&P Global at 52.3.

Losses for the stock market, focus on the bond market

For the stock market, it was a week of losses with both VIX and MOVE registering gains. Over in the bond market, Treasury yields finished higher on the furthest end, even after pulling back off the highs on Friday (NFP), and also in real terms. Market pricing (Refinitiv) for September’s Federal Open Committee Meeting is still in favor of holding and remains in the minority on whether we’ll see another rate hike in this cycle.

With labor market data out of the way, it leaves pricing data to influence those probabilities.

Plenty of pricing data in the week ahead

When it comes to the week ahead, it’s much quieter in comparison with the clearest exception: pricing data. This Thursday, we’ll get CPI (Consumer Price Index) readings for the month of July. Expectations are that we’ll see the y/y print rise from 3% to 3.3%. From here on out, we won’t be able to rely on base effects, given that the peak in the headline y/y was last June above 9%. Additionally, the stickier core is expected to be at 4.7% from 4.8%, with m/m growth at 0.2% for both (Nowcasts are higher for all four).

Producer prices will be on Friday, and it’s been painting a rosier picture with the y/y print at just 0.1% last time around and core at 2.4%. On the same day, preliminary figures out of UoM (University of Michigan) will be released. There are hopes that its consumer sentiment print will stay above 70, and inflation expectations will either remain unchanged or be lower for the 12-month and five-year horizons. While auctions aren’t normally of significant concern, demand will be noted after what happened last week, with the 3-year tomorrow, the 10-year on Wednesday, and the 30-year on Thursday.

Leftovers

Otherwise, we’ve got consumer credit tonight for the month of June after a notable pullback in growth last time around, NFIB’s small business index and trade tomorrow, and the usual weekly readings. In terms of earnings, we’ve got smaller EV makers with Lucid expected today and Rivian tomorrow, and media conglomerates with Paramount today and (Dow 30 component) Disney on Wednesday.

Dow technical analysis, overview, strategies, and levels

The intraweek highs and lows fell short of reaching its previous weekly 1st levels, leading to a lack of clear trading opportunities for both conformists and contrarians. Traders are closely observing whether the gains prior to last week's losses can hold, as a failure to do so might bring us back to the previous average, potentially testing the overview in both weekly and daily time frames.

The current technical overview remains 'bull average' for both time frames. However, the proximity of price indicators in shorter-term time frames suggests that a shift in the overview may not be far off, especially if losses persist. Traders should stay vigilant and adapt their strategies accordingly to navigate the evolving market conditions.

IG client* and CoT** sentiment for the Dow

In terms of sentiment, there has been no change for CoT speculators, who are still in slight buy territory at 52%. Two weeks ago, they shifted from being majority short (longs +64 lots, shorts -72). However, CoT speculators remain an opposite majority sell in the S&P 500 (64%), Nasdaq 100 (55%), and Russell 2000 (69%).

On the other hand, retail traders had a positive week as the majority sell bias significantly dropped from an extreme short of 79% at the start of last week to a heavy sell of 73% at the beginning of this week. This provided an opportunity for fresh shorts to close out their positions.

Dow chart with retail and institutional sentiment

_{*The percentage of IG client accounts with positions in this market that are currently long or short. Calculated to the nearest 1%, as of today morning 8am for the outer circle. Inner circle is from the previous trading day.
**CoT sentiment taken from the CFTC’s Commitment of Traders report, outer circle is latest report released on Friday with the positions as of last Tuesday, inner circle from the report prior.}