In hisDaily Market Notes report to investors, Louis Navellier wrote:
Technical Melt-Up
The market will try again today to break through the 50% retracement off the bottom.
History continues to repeat: In ’74, ’04, & ’09 stocks bounced off a 50% retracement of the bottom before pushing through. Yesterday, we did it again. This time was also the quickest bounce off the bottom, reflecting heightened volatility and the much more unusual circumstances of the global pandemic recovery, the massive swing from QE to QT by the Fed, and the sudden spike of inflation.
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We've also not seen a correction of this magnitude with such low unemployment and earnings still growing. If we can close convincingly above 4,231 (the 50% retracement level) on the S&P, there's a decent chance of a technical melt-up as dry powder comes off the sidelines believing we are no longer in a Bear rally.
It's not happening in a vacuum; credit spreads have contracted meaningfully and interest rates have moderated despite the current high inflation levels. It's notable that the VIX has dropped below 20, reflecting lower near-term fears.
Lower Inflation
Also helpful today are the Michigan Consumer surveys for August which reported higher expectations and sentiment well ahead of forecasts, albeit the Current Condition was weaker. The 5-year Inflation Expectations clicked higher even though current Inflation Expectations clicked down a notch, aided by materially lower prices at the pump.
The Wall of Worry that remains is best reflected in the yield curve where short rates are rising again on expectations for the Fed to remain hawkish until they see an established trend of lower inflation, while longer yields are softer, leaving the 2-year 40bps higher than the 10-year, a hallmark of a pending recession.
The US Dollar index is higher, following short-term yields. Energy prices are modestly lower across the board this morning, including gasoline, as are industrial metals.
Delisting Chinese State-Owned Companies
Of note today is that five Chinese state-owned companies announced plans to delist from the NYSE, more evidence of heightened tensions between the US & China following Pelosi's visit to Taiwan.
For now, the risk remains to the upside if stocks can move past the 50% retracement level. Keep filling towards target positions of strong earners, although very high P/E's remain vulnerable should interest rates rebound to previous highs if recession fears continue to fade.
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