Dow 30: Futures in retreat as recessionary fears remain high

Weak US labor data, rising recessionary fears, and the flight to safety

There’s been weakness under the hood for quite some time now, but it finally reached the headline figures with more clarity last Friday as US Non-Farm Payrolls out of the Bureau of Labor Statistics showed growth of only 114K for the month of July, more notable the rise in the unemployment rate to 4.3% (and triggering the ‘Sahm Rule’ that the economy is in a recession when the three-month average is half a percentage point above the 12-month low), and a larger increase in the U6 from 7.4% to 7.8% . Other items included wage growth that grew month-on-month (m/m) by only 0.2% also beneath forecasts, and the year-on-year (y/y) reading fell a couple notches to 3.6%.

Recessionary fears sent key US large caps into retreat, and it was a red finish for the week with the Nasdaq falling into correction territory, in weekly percentage terms even worse for the at-risk small-cap Russell 2000 and S&P MidCap 400 as the story was no longer about rotation but safety. Most sectors finished Friday’s session in the red led by consumer discretionary, while defensives were on top.

Treasury yields experienced a big pullback that was harsher on the front end, breakeven inflation rates fell to levels unseen since 2021, and market pricing (CME’s FedWatch) is now far more optimistic about rate cuts for the Fed’s remaining three meetings of this year and via majority anticipating a 50bp reduction in September. And yet, there was a bit of pushback from FOMC (Federal Open Market Committee) members, the Fed's Barkin not wanting to "prejudge meetings" and Goolsbee preferring they act in a "steady" way and not overreact.

Week Ahead: PMIs and more earnings

As for the week ahead, it’s far quieter in comparison, and where the start is expected to be busier than its end when it comes to US data. Services PMIs (Purchasing Managers’ Index) will be released later today out of both S&P Global and ISM (Institute for Supply Management) with the divergence between the two noted as the former enjoyed a decent expansionary reading last time around while the latter suffered surprise contraction, and noting its employment component for any further signs of labor market weakness.

There’s also the Fed’s loan officer survey for the second quarter of this year to see whether there’s ongoing weakness in demand as well as tightening standards for certain types of loans from banks. It’s mostly lesser-impacting items thereafter with trade and economic optimism (out of RCM/TIPP) tomorrow, consumer credit on Wednesday preceded by the weekly mortgage applications, and the usual claims on Thursday.

Plenty of Treasury auctions this week, with extra attention on the notable 10-year and 30-year at a time when fears regarding demand keeping up with supply have dropped as safety is sought after. In earnings, there’s Uber and Super Micro Computer tomorrow, (Dow 30 component) Disney on Wednesday, and Eli Lilly on Thursday.

Dow Technical analysis, overview, strategies, and levels

The technical overview has shifted on the daily time frame to ‘consolidation – volatile’ where conformist strategies are breakouts and contrarians are reversals following the pullback late last week that threw a wrench into key technical indicators on the shorter-term time frame.

But zooming out to the weekly time frame and it’ll need more of a pullback (the likes of which we’ve seen in the tech-heavy Nasdaq) to shift it from ‘bull average’. But that doesn’t mean a lack of caution for those opting to go conformist, as under such an overview buying off the weekly 1^st Support only ought to be after a significant reversal should it present itself, and avoiding fading strategies that while triggers more easily can also get stopped out more often. Those who expect a further pullback in price and see themselves in the contrarian camp anticipating a shift in the technical overview can either sell via reversal off the 1^st Resistance or sell using a breakout strategy off the 1^st Support.

IG client* and CoT** sentiment for the Dow

CoT speculators raised their long bias to a heavy 66% on an increase in longs and a simultaneous drop in shorts (longs +1,613, shorts -559), though positioning is as of last Tuesday and means prior to the price pullback late last week that will likely see the net buy sentiment drop when the next report is released this Friday.

There’s been a significant move in percentage terms among IG Clients, dropping from extreme sell to 78% in just one week having shorted into price gains prior, and in all beneficiaries of the red weekly finish and lower moves in the futures market.

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.