Where Are We Now?
With the dog days of summer officially upon us, I thought it might be a good time to take a look at where we are in the stock market right now.
The Good News
Although there are an abundance of moving parts and volatility amongst individual stocks remains incredibly hight, we must take note that the market sits within spitting distance of all-time highs. From a technical perspective, the bottom line is the S&P 500 remains in pretty good shape. Yes, there is plenty of trader consternation and fear floating around, but the charts themselves continue to paint a constructive picture.
If you'd like to stop reading and move on, the next sentence really somes things up. The macro backdrop remains very positive. Recent Philly Fed readings point to ongoing economic resilience. Corporate earnings remain nothing short of robust, with consensus EPS expectations holding firm through 2027. The AI buildout and the broader computing revolution continue to provide a powerful secular tailwind. And while the Fed remains antsy about the overall readings, inflation (ex-oil, of course) looks to be heading in the right direction.
Rates are the one macro area that is not really behaving. Traders remain concerned about crowding-out effects from Mag 7 corporate issuance, the $40 trillion in U.S. debt, the $1.2 trillion deficit (which is clearly unsustainable), Bessent’s intervention, and residual inflation worries. Still, from my seat anyway, the rate concerns have not yet derailed the bigger fundamental picture.
The Bad News
The historical "sloppy period" continues. Remember, traders love their historical analogs. So, when price starts acting like it has in the past in a slow period, it is a safe bet that the historical cycles just might play out as expected.
For example, the NDR Cycle Composite (which is a mashup of all 1-, 4-, and 10-years cycles since 1928) for mid-term election years continues to project a decline into October 1. Note the decline in the blue line (the cycle projection) versus where the market is now (the dashed orange line). But the good news is the traditional year-end rally in Q4 is projected to be on tap.
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Other data suggests seasonality turns distinctly negative until mid-October. In addition, extreme overbought conditions are present, and sentiment has become overly optimistic. Although these conditions can persist for long periods of time, they also "set the table" for some selling.
To add some fuel to this potential fire, we note that margin debt appears to be a problem. don't look now fans, but the year-over-year change in margin debt appears to have peaked. This matters because historical peaks in this series foreshadowed some pretty nasty equity downturns in 2000, 2008, and 2021.
Finally, the recent bounce in crowded/momentum/AI trades has created an opportunity for profit-taking. So, again, some selling isn't going to surprise me here.
It’s a Trader’s World (and We Just Live in It)
JPMorgan noted that quant and systematic players were likely the key factor behind the recent roller-coaster ride. However, the note was quick to point out that the firm saw no signs of anything structural changing.
We believe surging volatility continues to be sponsored by 0DTE options, levered single-stock ETFs, and futures on single stocks.
Get this... Goldman Sachs observed that there have been more than 20 one-day –5% selloffs in its High Beta Momentum basket this year—more than the prior five years combined! Yowza.
In short, it's my opinion that this remains a trader’s market driven by positioning, leverage, and short-term flows rather than a classic fundamental or technical regime shift.
What’s On Tap This Week
- Economic “D-Day” for the Iran presser this afternoon
- Nvidia reports Wednesday
- Core PCE and GDP on Wednesday
- Warsh’s Jackson Hole speech on Friday (bond traders feel he has some explaining to do)
Bottom Line
From my seat, the weight of the evidence still favors giving the bulls the benefit of the doubt on a longer-term basis. The fundamental backdrop remains supportive, the primary trend is intact, and the AI/computing revolution continues to power leadership. That said, the near-term setup is messy: seasonality, overbought readings, extreme sentiment, peaking margin debt, and the mid-term election cycle all argue for continued choppiness or a pullback into early October.
My plan is to treat any near-term weakness as an opportunity within the context of the larger bullish structure—unless and until the bigger models begin to break down. Our thought is to stay flexible, manage risk, and remember that in a trader’s world, the path higher is rarely a straight line.
"To be yourself in a world that is constantly trying to make you something else is the greatest accomplishment." -Ralph Waldo Emerson
Wishing you green screens and all the best for a great week,
David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research
Disclosures
At the time of publication, Mr. Moenning held long positions in the following securities mentioned: NVDA - Note that positions may change at any time.
NOT INDIVIDUAL INVESTMENT ADVICE. IMPORTANT FURTHER DISCLOSURES