Dow 30: Notable gains as market participants brace for Fed’s Powell

Solid week for risk appetite, dovish FOMC talk, and rate cut likelihoods still generous

There was more data to digest last Friday with UoM’s (University of Michigan) preliminary figures, and where consumer inflation expectations were unchanged. Its consumer sentiment reading improved to 67.8 and managed to best forecasts, but it still has a long way to go to reach pre-pandemic levels.

There were more FOMC (Federal Open Market Committee) members speaking: Goolsbee not wanting to “tighten any longer than you have to” with the current atmosphere “not what an overheating economy looks like to me”, and Daly for a "prudent" approach in lowering rates.

Key equity indices finished higher with the S&P 500 notching its best week of the year and gains larger for the Nasdaq, the data thus far generally in line with what market participants had been hoping for in terms of removing hard landing fears, and where at this stage avoiding the plummets witnessed earlier this month helping build confidence that the worst might be over.

As for Treasury yields, they finished the week slightly lower than where they started and hardly changed in real terms, and market pricing (CME’s FedWatch) fully pricing in a rate cut in September but a minority on it being a larger 50bp (basis points).

Week Ahead: Fed Chairman Powell, preliminary PMIs, and housing data

As for the week ahead, it’s a light start with little to digest out of the US and will remain the case tomorrow unless we can get something exciting out of the FOMC members speaking, with traders bracing for the heavyweight on Friday at Jackson Hole with Fed Chairman Powell. Minutes from their latest meeting will release on Wednesday in a session where there will be more housing data with the weekly mortgage applications enjoying sizable gains for two weeks in a row, and on Thursday existing home sales for the month of July the story as of late one of successive declines that aren’t far off the lows suffered late last year.

The weekly claims will also release that day and is still expected to carry added weight in the current phase and follows consecutive beats, and there are the preliminary PMIs (Purchasing Managers’ Index) out of S&P Global expected to show ongoing expansion for services but drop, and for manufacturing to improve but remain in contraction. New home sales data out of the Census Bureau has been surprising to the downside as of late, but July’s forecasts are for month-on-month improvement even if insignificant. In earnings, more from the retail sector with Lowe’s tomorrow and Target the day after.

Dow Technical analysis, overview, strategies, and levels

The technical overview was and remains ‘bull average’ on the weekly time frame, and there’s no denying how the strong gains last week have helped its overview from shifting and witnessed on the shorter-term daily time frame earlier this month. Price is back above all its main moving averages on the weekly time frame (and so too the daily), though there are a few other key technical indicators that are still neutral such as the DMI (Directional Movement Index) where its DI+ needs more distance over the DI-, an ADX (Average Directional Movement Index) still in non-trending territory, and an RSI (Relative Strength Index) beneath overbought territory.

On the strategic front, the buys continue to fall into the conformist camp be it via breakout off the weekly 1^st Resistance level or only after a significant reversal off the weekly 1^st Support. Those expecting a pullback from these levels can entertain contrarian strategies be it selling the 1^st Resistance but only after a reversal (waiting for the level to breach by an amount and only if it comes back down else ignore shorting into a rally), or via sell-breakouts off the 1^st Support.

IG client* and CoT** sentiment for the Dow

CoT speculators were in for another week of unwinding in terms of their majority buy bias, taking it from 60% to just 52% on a reduction in longs and a simultaneous increase in shorts (longs -3,472, shorts +2,660). Another change like that and they'll be in net sell territory, though the price gains from last Tuesday onwards may entice momentum traders back in and take the long bias higher this week.

IG clients have generally been selling into price gains with longs enticed into closing out as well, and has meant the bias among them has risen from a heavy sell 67% last Monday to an extreme sell 78% at the start of this week.

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.