Coiled Spring Capital Mid-week Report 8/21/24

We frequently emphasize the significance of changes in simple market structures—and for good reason. It’s surprising how many people, both professionals and retail investors, persist in predicting where the market is headed or where it’s "destined" to go while overlooking the most crucial variable: price. Price is the only factor that actually generates profits in the stock market. Many underperform the indexes because they disregard this fundamental truth, clinging instead to the belief that their opinions are more accurate than market prices. Here’s the reality: opinions don’t make money in the market; only price does.

So, what exactly are we talking about? In last weekend’s report, we highlighted that the indexes experienced not one but two follow-through days (FTDs) last week. We’ve previously discussed the importance of FTDs when trying to identify a bottom after a market drawdown. We also noted the upside gap in the indexes that occurred above key resistance levels. This was a powerful double signal of important market structure shifts. Just as the gap down in mid-July was a critical indicator that prompted us to adopt a defensive stance, the recent structural changes are what gave us the confidence to call the market lows.

Here is an excerpt from last weekend’s report:

In our Aug 11th report, we did an extensive overview of all the major sector ETF’s in the stock market, and our conclusion was unwavering. This was the first sign that buyers were supporting the market.

Here is that excerpt:

Fast forward a week, and we've witnessed multiple follow-through days (FTDs), unfilled gaps, breadth breakouts, and significant improvements in market internals. We analyze the stock market holistically, breaking down and interpreting the various moving parts within this complex machine. While technical analysis forms the foundation of our approach, its effectiveness is heightened when our indicators and macro-technical analysis align with the broader market trends. In last weekend’s report, we highlighted some of these internal improvements, and we recommend revisiting that analysis.

Today, two potentially market-moving macro releases were in focus: 1) the jobs revision and 2) the Fed minutes from their last meeting. The job revision came in higher than expected, indicating a weaker employment situation than previously thought.

The BLS revision was reported at -818K, above the expected -600K, but likely not enough to alter the bond market's expectation of a rate cut in September. What’s noteworthy is that the job market appears to be cooling at a measured pace, reducing the likelihood of a larger, more aggressive rate cut.

The Fed minutes skewed more dovish than anticipated, but there was nothing in the release to suggest a larger rate cut is imminent.

The bond market is now pricing in a little more than a 25 bps cut in September; status quo is good for the market.

Powell’s remarks at the Jackson Hole Symposium on Friday are the last macro hurdle this week to overcome. We sense that Powell will echo the comments from the minutes, remain data dependent, but give the official nod for rate cuts to start in September. This likely keeps the Fed Fund futures stable, which is supportive for the stock market. As per Bespoke, returns in and around the event tend to be quite mixed.

The stock market has had an incredible run into this week’s event, and some backing and filling after the recent rally would make sense, but that doesn’t mean it will.

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