Dow 30: Quiet start before impacting data later this week

Controlled pricing growth, Dow’s record high, and the rate cut

Pricing data last Friday showed PCE (Personal Consumption Expenditures) Price Index for the month of July hold year-on-year for its headline at 2.5% and so too its core (which excludes food and energy) at 2.6%, with month-on-month (m/m) increases rounding to 0.2% for both. The revised figures out of UoM (University of Michigan) for August also released later that day, and it showed consumer inflation expectations for the 12-month fall a notch to 2.8% while the five-year remained at 3%.

Key US equity indices were mixed where the Dow enjoyed a record close while the Nasdaq 100 was in slight retreat. Treasury yields haven’t taken as much attention lately and finished the week higher, and where market pricing (CME’s FedWatch) is still fully pricing in a rate cut out of the Federal Reserve’s (Fed) upcoming meeting later this month but where minority likelihoods have dropped on the first reduction in this cycle being 50bp (basis points).

Week Ahead: NFP and PMIs

As for the week ahead, we’re going to have to work in reverse if you’re looking for impacting data that could tilt the odds in favor of a larger rate hike out of the Fed. Pricing data is out of the way until next week’s August CPI figures, and the focus is growing on their other mandate ever since the “balance of risks” commentary emerged out of the central bank. That means labor data will continue to carry extra weight in the current phase with any signs of weakening raising rate cut likelihoods.

US Non-Farm Payrolls (NFP) is expected to show growth of about 160K for August after July’s notable miss, with an eye on the unemployment rate that reached 4.3% in July to see if it can drop to 4.2%. There will be plenty of labour data leading up to the event with job openings (out of JOLTS) on Wednesday, and plenty on Thursday including the weekly claims and ADP’s non-farm estimate. Manufacturing and services PMIs (Purchasing Managers’ Index) will release a day after the rest due to today’s holiday, and not just to see whether the former will remain in contraction while the latter remains expansionary but also their respective employment components.

Dow Technical analysis, overview, strategies, and levels

The technical overview on the weekly time frame was and remains ‘bull average’, with the record highs keeping quite a few key technical indicators flashing green with price above all its main short and long-term weekly moving averages, at the upper end of the of the band (and walking it as of late), and on the DMI (Directional Movement Index) front a sizable gap for the +DI over the -DI. Its RSI (Relative Strength Index) is just beneath oversold territory, while its ADX (Average Directional Movement Index) is rising but yet to clearly reach a reading that signifies trending territory.

Classifying the overview might be the easy part, but it’s on the strategic front where it gets trickier. That’s due to wider weekly levels where steady gains like we saw last week failed to reach its 1^st levels lacking a play for both conformist and contrarians. There’s also the matter of the shorter-term daily’s technical overview that while shows significant positive technical bias, has yet to match the weekly’s due to price-indicator proximity. Buy strategies remain in the conformist camp and sells are reserved for contrarians, but in a week where the attention will be on fundamental data releasing later means much of the initial action will likely gravitate around the RSP (Relative Starting Point).

IG client* and CoT** sentiment for the Dow

CoT speculators continue to hold a majority buy 59% bias that hasn’t budged week-on-week with small reductions in both long (by 508 lots) and short positions (by 704). The latest positioning isn’t in line with previous momentum correlation where there would be an increase in net long bias on price gains, and more so given the recent record highs.

IG clients are pushing further into extreme sell territory as price gains continue to entice longs into closing out and some fresh shorts into initiating. Shorts that have initiated at lower levels will need a halt in recent price gains and at least oscillatory price action to work their way out even if partially.

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.