Weekly Update: There’s Blood on the Street
It was not a fun week for investors.
The S&P 500 fell 4.0% and the Nasdaq was down a full 5.5% in the shortened trading week.
This morning, the long-awaited Employment Situation report of non-farm payrolls was released. Although it showed 142k jobs had been added, this was below the 160k consensus estimate.
After last month’s revision lower (fancy way of saying the government lied and overstated the jobs numbers last year), stocks sold off further in response.
Market leadership took the biggest hits this week. Nvidia, which has been the clear front-runner of the 2023-2024 bull market, is down 21% since reporting earnings last week.
I held several webinars last month warning investors to get out of NVDA after seeing massive selling by company insiders.
The picture was crystal clear.
Hopefully you took our advice and side-stepped the collapse.
Right now, the S&P 500 is at a critical juncture.
By adding a volume profile indicator to a daily chart of the index, we can see where most of the trading has occurred over the last few months.
Looking at the profile along the right side of the screen, we notice several high and low volume areas on the SPY.
The 545 and 530 levels, for example, show prominent high-volume nodes. These are areas where buyers and sellers tend to meet. They act like price magnets.
The 538 area, on the other hand, has seen almost no trading activity. I have highlighted this area with a white box on the chart below:
Historically, low-volume nodes like this tend to be either rejected or blown through quickly.
In other words, if the market does not bounce here at the beginning of next week, expect to see the selloff continue.
The only silver lining to this recent selling is the effect it is having on interest rates. Powell was clear in his speech from Jackson Hole last month that the Federal Reserve is reversing course on monetary policy. He all but confirmed a rate cut at the next Fed meeting.
But some traders are now forecasting a potential 50 bps cut.
10-year bond yields are falling. In fact, interest rates made new 52-week lows today.
The sector likely to benefit most from lower borrowing rates is construction.
Potential buyers who have been reluctant to move from fear of trading their 3% mortgage for an 8% one can now borrow at around 6%. If the Fed aggressively cuts in 2025, we could see that number fall to 5% which, in my opinion, would spur a huge housing boom.
So, it is no surprise that homebuilders – along with related groups like banking, real estate, insurance and building products – are performing best right now.
Real estate has been out of favor for three and a half years, but it could be the trade of the year in 2025.
Best wishes for your trading,
