Client Newsletter Example: Retail Sales Jump for July - No Real Concerns Regarding the Consumer Yet - Major Indexes Achieve Key Levels Again

Published on August 15, 2023 @ 6:46am

Retail sales for July jumped higher than expected, but it's all still within a pretty normal historical range, suggesting nothing alarming on either side of the equation. Your most important indexes bounced on cue yesterday and are still in a position to potentially move higher. However, based on yesterday's price action of the NASDAQ 100 and S&P 500, here are the most important levels traders and investors will need to keep a close eye on.

Retail Sales Jump for July - No Real Concerns Regarding the Consumer Yet - Major Indexes Achieve Key Levels Again

Before the markets opened this morning, professional traders received better-than-expected retail sales data. While economists were expecting a 0.3% rise for July over the comparable period a year ago, the US Census Bureau reported a 0.7% increase, which included food and energy.

How did the markets react to the data as soon as it hit the tape? They didn't. Prior to the data being released, they were down a bit in the morning, and that didn't really change much. Instead, it appears all of the major indexes continue to remain more fixated on the near-term technical outlook than anything else.

Provided here are daily charts of the NASDAQ 100 and S&P 500, and as you can see, both bounced right on cue yesterday but are down on the open this morning. However, this does not mean they can't find their footing early this morning and build on yesterday's short-term momentum higher.

No guarantees, because as it stands right now today is going to become fairly pivotal. Meaning, a move above their 3X3 DMAs (dark blue curved lines) that I've pointed to here would increase the probability of even higher levels ahead, while a break below yesterday's low on the NASDAQ 100 and/or a break below Friday's low on the S&P 500 would suggest even lower levels ahead.

For now, however, we're going to lean into the idea of more potential upside ahead because when you step back and look at the weekly charts of the NASDAQ 100 (QQQ) and the S&P 500 (SPY), you can see here that both have every technical right to find their way back above their 3X3 DMAs here as well. And if that happens, it's going to be really interesting to see how these markets end up reacting as soon as next week.

In other words, if there is going to be another pivotal short-term top put in on the NASDAQ 100 and/or S&P 500, it would likely come as soon as next week. If, however, both can end up bucking their last two weeks of weakness and, more importantly, end up testing their highs for the month, I suspect both will end up testing their all-time highs in fairly short order.

That's pretty much where it all stands right now because anything between their recent highs and their recent lows really doesn't mean much at all. Longer-term trend reversals are usually preceded by larger than normal head fake swings in both directions, while short-term trend reversals look a lot like what we've seen so far over the last few weeks.

The bottom line is there really hasn't been anything too fundamentally or technically alarming that has surfaced yet to trigger another major move lower for these markets. Sure, we still remain somewhat concerned about that all-important SKEW Index we've continued to fixate on lately, but even that has come down quite a bit over the last several days.

Provided here is a weekly chart of the SKEW Index, and as you can see, it's now well off its highs. The concern that continues to remain a bit of an issue, however, is that it's looking a lot like it did back in late 2021, just before all of the major indexes imploded in the months that followed. Then again, everyone's perspective is their own reality, which is ultimately what makes a market!

There's no question there's a lot going on out there these days. Fundamentally, the economy and earnings really don't look bad. While forward sentiment regarding interest rates and inflation continues to remain a concern, the flip side to that argument is that Americans are starting to get used to higher prices and higher interest rates.

I've said it before, if rates and inflation do continue to rise sharply, these markets could very well go higher with them. However, at some point down the road, that would likely end up breaking the consumer's back. We're not there yet, so there's really nothing to worry about anytime soon, but that's also assuming nothing surfaces on the geopolitical front to spook these markets either.

For now, our ongoing theme of taking profits when they're there and using stops to manage things all along the way continues to be the strategy. Add that to ensuring we continue to focus far more on your higher quality, more proven names and ETFs, and we should continue to be able to squeeze what we can out of these markets without taking on too much risk.

There will be a time to increase the risk associated with the small-cap sector, but I still don't believe the time is now. Instead, it's far more important to focus on companies that have proven themselves vs. those companies that have yet to prove worthy of strong revenue and/or earnings growth. As a matter of strong opinion, I would strongly suggest traders and investors stay focused on the above vs. over speculating on things that could implode on any given day or week.

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John Monroe - Senior Editor and Analyst