Dow 30: Calm ahead of impacting data this week

Recovery relief, an eye on Japan, and rate cut likelihoods

The start of last week might have been a tough one, but the recovery thereafter buoyed partially by US data that reduced fears of a hard landing managed to raise hopes that the worst might be over. Key US equity indices finished the week closer to where they started, with an eye on how Japan was faring as larger percentage moves were in store for the Nikkei 225 before the calm late last week, traders assessing where the volatile yen would settle and its implications on the reverse carry trade. Treasury yields finished the week higher though seen as a positive if it helps avoid painting a picture of a hard landing, and market pricing (CME’s FedWatch) still very much anticipating generous rate cuts out of the US Federal Reserve (Fed) compared to pre-NFP (Non-Farm Payrolls), roughly a coin toss on a 25bp (basis point) cut vs. a larger 50bp in September, and fully pricing in reaching 4.25-4.5% in December. In FOMC (Federal Open Market Committee) member speak, there was the Fed’s Bowman on the "need to be patient and avoid undermining continued progress on lowering inflation by overreacting to any to any single data point".

Week Ahead: CPI, PPI, retail sales, and earnings from retail heavyweights

As for the week ahead, there’s quite a bit out of the US to note in terms of data. Although the labour market softening has gotten much of the attention since the start of this month, there’s no forgetting the other mandate of the Fed. PPI (Producer Price Index) figures for the month of July release tomorrow forecast to show month-on-month (m/m) growth of 0.1%, this after hotter readings for June where core year-on-year (y/y) reached 3%. The main pricing event is on Wednesday with CPI (Consumer Price Index), and hopes are that m/m can round down to 0.2% with the y/y headline falling beneath 3%. Trade pricing data will release on Thursday after contained m/m June prints, and on Friday there are the preliminary readings out of UoM (University of Michigan) that’ll include consumer inflation expectations.

Thursday’s weekly claims should take extra attention in the current phase, releasing at the same time retail sales for July which has struggled to provide headline growth for three consecutive months. The same day will see earnings from Walmart, while Home Depot’s will release on Tuesday (and both are components of the Dow 30). In addition to the latter’s earnings for those noting the housing sector, there’s the weekly mortgage applications on Wednesday to see if the recent pullback in rates will be enough to offer consecutive sizable increases, NAHB’s housing market index the day after expected to suffer its fourth consecutive sub-50 print, and both building permits and housing starts on Friday.

Dow Technical analysis, overview, strategies, and levels

The pullback last week went beneath its bull channel on the weekly time frame, with most of its key technical indicators neutral but price still above its main long-term weekly moving averages. There was the fundamental scare that meant price action was busy off its previous weekly 2^nd Support, in the end moving back up and recovering all its losses giving conformist buy-after-significant-reversals the eventual win over conformist sell-breakouts off its previous 1^st Support. As for the daily time frame, the technical overview shifted prior to ‘consolidation – volatile’ where breakouts are in the conformist camp and reversals are for contrarians.

IG client* and CoT** sentiment for the Dow

CoT speculators are no longer in heavy buy territory due to a drop in long positions (by 6,070 lots) and the little change in shorts (up 99), hardly a surprise given the pullback experienced late in the week before, and where there’s a relatively high correlation with momentum trading when it comes to positioning in this index.

IG Clients raised their sell bias to a heavy short 67% with a bit of range-trading occurring towards the end of last week at the short-term resistance level.

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 the start of this week for the outer circle. Inner circle is from the start of last week.
**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.