August posted a strong recovery from July’s increased volatility, which took the markets into correction territory but then rallied right back out.
First, let’s look at the $QQQ, the technology ETF that represents the Nasdaq 100. We’re examining this one first because the NASDAQ and technology stocks have been leading the market rally, so they will likely lead the market back down. That’s exactly what happened in July, as the $QQQ had a neckline break on a head and shoulders pattern. Subsequently, the rally that followed the correction made a lower high, which is bearish. This tells us technically that after the markets rallied back near prior highs, people who owned technology stocks were happy to cash out of their positions before reaching the prior all-time highs.
This was not the case with the $SPY, which did rally all the way back up to the prior highs, forming what looks like a double top on the daily chart. From a technical perspective, this makes a lot of sense as the $SPY is based on the S&P 100 index, which is more diversified than the tech-heavy Nasdaq 100. The S&P 100 benefited from sector rotation, meaning traders and investors who were cashing out of their technology positions reinvested some of that money into financials, energy, and other consumer cyclical stocks that are all listed on the S&P 100.
That brings us to the $DIA, which is the ETF that trades with the Dow Jones Industrial Average. Like the $SPY, it benefited from sector rotation as traders and investors sold technology and bought industrials. August saw strong gains in the $DIA, as it rallied all the way up and made new all-time highs before backing off.
All About The Rate Cuts
Strangely enough, August’s strong recovery was in part helped by weak economic data. Traders and investors have been looking for clear guidance from the Fed about September’s rate cut. In August, Fed Powell finally gave them what they were looking for at Jackson Hole, as a result of the economic data. However, markets are forward-looking, and now that they have factored in that point rate cut in September, they are looking for more. They might not be likely to get it, however, as inflation continues to be a problem.
Election Volatility on the Horizon
Finally, we are less than 70 days away from the presidential election. This is the final stretch! Usually, this is the period when market volatility increases drastically going into election day. There is a lot at stake in this election, so this uncertainty will weigh heavily on the markets. It’s important to know that the uncertainty doesn’t end with election day; it will continue until power is peacefully turned over and cabinet selection is complete. Prudent traders and investors alike should expect continued volatility in the coming months.
Trade carefully and enjoy your Labor Day weekend!
Written by Michael DiGioia, Director of Education
Mike is available for One-on-One Coaching. Learn More
