Overheated Market Hits a Wall
The busiest week of the earnings season has concluded, capping a month of strong gains. The price action opened above central weekly levels for securities that presented a weekly bullish setup, such as $S&P 500(.SPX)$ $NASDAQ 100(NDX)$ $Alphabet(GOOG)$ $Alphabet(GOOGL)$ $NVIDIA(NVDA)$ $Meta Platforms, Inc.(META)$ $Microsoft(MSFT)$. The bullish targets for the week were reached and, for some, surpassed. However, as anticipated, a familiar pattern from the last three years appears to be re-emerging. An overextended July has given way to a pullback in August, and the catalysts for such a move materialized this week.
The earnings reports from META and MSFT were positive, fueling the last day of the rally in extended market hours on Wednesday. The opening on Thursday presented a gap up that was quickly filled after reaching major target zones for NDX and SPX that I had been anticipated since April. As expected, the subsequent earnings report from $Amazon.com(AMZN)$ sealed the decline, given the market's negative reaction to its guidance. Last week I anticipated this catalyst from AMZN.
The shares of Amazon tumbled more than 8% after the company issued light operating income guidance for the current quarter, raising concerns about future profitability. Apple stock also contributed to the downturn, slipping 2.5%.
The budget commitments to A.I. are increasing the capex in many companies. Meta raised its forecast for capital spending to a range of $66 billion to $72 billion. This follows Google parent Alphabet's move last week to increase its capital spending projection to $85 billion for the year. The central question is when these substantial AI investments will begin to translate into tangible revenue or profit growth.
On the economic front, the July jobs report painted a bleak picture of the labor market. The U.S. economy added just 73,000 non-farm payrolls last month, falling well short of the 100,000 consensus increase. Compounding the weakness, prior months saw drastic downward revisions. The job growth for June was revised down to a mere 14,000 from an initial reading of 147,000, while the May figure was slashed to 19,000 from 125,000. These revisions signal that the labor market has been weakening for a considerable time.
The weak economic data had an immediate ripple effect across sectors. Bank stocks were sharply lower amid fears that a slowing economy could negatively impact loan growth. The jobs report significantly increased the odds that the Federal Reserve might intervene sooner than expected to cut interest rates and support the economy. Following the release, traders priced in an approximately 86% probability of a rate cut at the Fed's September meeting.
Adding to the negative sentiment, the White House announced that goods transshipped through other countries in an attempt to circumvent the tariffs will face an additional 40% levy. Canada, one of the largest trading partners of the U.S., will see its levy increase to 35% from a previous 25%.
While there are improvements in some macro indicators compared to my analysis posted in February prior to the bear market, the context remains sensitive to weak job reports and any bad news on the macro side as the tariffs despite of the good news regarding GDP on Wednesday.
That said, a confluence of disappointing tech guidance by some giants, a weak jobs report, and renewed trade tensions sent shockwaves through the market, weighing heavily on the major averages that came overbought and several bearish reversal signals had been invalidated during July.
Finally, Berkshire Hathaway, another company technically analyzed in this publication, reported its second-quarter results yesterday. The conglomerate's operating profit, which stems from its wholly owned businesses like insurance and railroads, dipped 4% year-over-year to $11.16 billion. The decline was primarily attributed to a downturn in insurance underwriting performance. In contrast, its railroad, energy, manufacturing, service, and retailing divisions all posted higher profits compared to a year ago.
The market has arrived at a critical juncture, the NDX and SPX have hit major resistance zones anticipated since April to paid subscribers. With the market overbought across multiple timeframes, the much-needed pullback that should have began in late June could now extend further and last longer. The easiest phase of this bull run is likely over.
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