Dow technicals remain unchanged after another quarter in the red

Last Friday’s Personal Consumption Expenditures (PCE) figures for the month of August showed a 6.2% increase in its y/y (year-on-year) reading which was lighter than expected, but the same couldn’t be said for the rest with an m/m (month-on-month) increase of 0.3%, and its core which excludes food and energy above estimates at 4.9% and 0.6% respectively.

Other important items included personal income up 0.3% and spending a larger 0.4%, and revised figures out of UoM (University of Michigan) for inflation expectations amongst consumers year-ahead dropping to a one-year low of 4.7%, its key sentiment reading worsening to 58.6 for the month of September.

Thursday’s data included second quarter GDP (Gross Domestic Product) contracting by 0.6% (and for this quarter, the latest GDPNow estimate out of the Atlanta Fed showed a big jump from its previous 0.3% reading on the 27th of last month to 2.4%), and the weekly unemployment claims dropping below 200K.

As for central bank speak, the Federal Reserve’s (Fed) Brainard reaffirmed that “monetary policy will need to be restrictive for some time” and “committed to avoiding pulling back prematurely”, Daly “quite comfortable” with taking the key rate to 4.5-5% next year, and Mester seeing “more persistence in the inflation process”.

The stock market was in for another week of losses and the largest September losses in two decades, and another consecutive red quarter that this time went past June’s lows.

The spike in yields remained an item for risk-related assets to contend with, Treasury yields ending the month significantly higher across the curve, so too real yields that are very much in positive territory, and inversions improving only for the week given the outperformance on the further end of the curve last week, breakeven inflation rates for the 5 and 10-year in for a very notable drop to around 2.15%.

Market pricing for future rate hikes is showing it’s nearly a coin toss on getting a 75bp (basis point) increase in November, and so too on getting to 4.5-4.75% next year.

As for the week ahead, more manufacturing PMIs on offer with figures out of both ISM and S&P when it comes to the US, and the same holds true for services this Wednesday where the figures are expected to be more tested.

But given we’ve got Non-Farm Payrolls (NFP) this Friday means the attention will shift towards the US labour market, with job openings out of JOLTS tomorrow, ADP’s non-farm estimate the day after, and the usual weekly unemployment claims on Thursday.

Friday’s NFP reading is expected to show a 265K increase, the unemployment rate expected at 3.7% (if last time is any indication due to the labour force participation as inflationary pressures force some back into the labour market), and wage growth at 0.3%.

Dow Technical analysis, overview, strategies, and levels

Prices finished just beneath their previous weekly 1st Support level, with little on offer for conformist sell-breakouts and even less for buy-on-reversals, Thursday's Support levels failing to hold initially giving conformist sell-breakouts the edge and especially combined with the eventual follow-through on Friday that closed out beneath its daily 2nd Support, keeping its key technical indicators in the red on the daily and just about here on the weekly time frame.

It has also meant the technical overview is unchanged here as “bear average”.

Component performance on Friday showed all of them in the red by the close, losses largest for Nike by a massive margin after its release prior that showed a large inventory build and drop in profit margins.

IG client* and CoT** sentiment for the Dow

CoT speculators have raised their heavy sell bias from 67% to 70% on a drop in shorts by 503 lots and a simultaneous increase in longs by 1,395. They remain majority short Russell 2000 (77%) and S&P 500 (60%) but have shifted to the middle in the Nasdaq 100 ending about six months of majority buy bias there.

Retail traders are holding an opposite majority buy bias, but it has dropped out of heavy buy territory opting to start this week off at 64% instead of 70% last Monday.

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 last Monday.
**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.