Two weeks ago (in the 8/17 MidWeek Video), I was expecting a pullback to the 21-day moving average (or possibly the 50-day). When it started to occur, it seemed orderly, on light volume, and many of the leading stocks were acting well. I thought we would stabilize around the 21-day and start to head higher, but unfortunately, Fed Chair Powell came out last Friday to reiterate his priority of fighting inflation.
Since then, the Nasdaq Composite has seen two more distribution days (8/26 and 8/30), and now sits slightly below its 50-day. The conclusion from the recent price action is to shift back to defensive mode over the next month or so. I thought we were going to stabilize, but it now seems like rallies will be sold again and we are back to not seeing anything sustained until the Fed pauses their current rate hiking cycle.
The big question throughout July and into early August was “is this a new bull market or a rally within a bear market?” It’s looking more and more like the latter and defense should be a priority until we get more clarity from the Fed. The next CPI Report isn’t until Sept 13th, but it doesn’t look like that will be enough data for the Fed to pause at the next meeting on Sept 21st. In my view, the only way they pause is if the market sees another significant leg down or if something happens in the bond market to force them to pause.
There are still many stocks acting well, but I’m going to keep positions light for now. I’m confident that we will see strong opportunities later this year, but for now, defense is the priority. By defense, I mean minimizing new buys, keeping positions light, and sticking to a strict loss-cutting policy if anything has a Friday close significantly below its 10-week moving average. I will discuss this note further in tonight’s video.