Day Traders Diary

9/12/22

The major averages rose on Monday as a weaker dollar and growing confidence that inflation has peaked helped Wall Street's relief rally continue. The Dow Jones Industrial Average gained 229 points, or 0.7%. The S&P 500 rose 43 points or 1% while the Nasdaq Composite added 154 points or 1.2%.

Energy was the top sector, but the rally was broad, with Bristol-Myers Squibb gaining nearly 6% and tech stalwart Apple adding 3.4%.

The moves extended a rebound for U.S. stocks, as all three major averages snapped a three-week losing streak on Friday.

Stocks have been volatile ahead of the Sept. 20-21 meeting of the Federal Reserve, where the central bank is expected to deliver its third consecutive 0.75 percentage point rate hike in an effort to combat high inflation. Fed officials have reiterated in recent weeks they will keep hiking rates to fight inflation even if it hurts economic growth.

But some recent developments, including a weakening U.S. dollar and military success by Ukraine, appear to be boosting investor sentiment. Many traders are also optimistic about the August consumer price index report, which is scheduled for release on Tuesday morning.

"The combination of the somewhat surprising successes in Ukraine, and the possible of very favorable inflation headline that maybe even shows a decline for last month, may put us into a situation where we have a continued rally here," said Phillip Toews, CEO of Toews Asset Management. "And at that point the main threat in the short term and in the medium term will be whether earnings continue to deteriorate."

Bridgewater co-CIO Greg Jensen said the belief that inflation is going to normalize to around 3% over time is too optimistic. The widely followed strategist believes that price pressures are going to stay "stubbornly higher than the market expects," he said at the annual SALT conference in New York. Persistent inflation, combined with slowing growth in the U.S., will continue to weigh on asset prices, Jensen said.

Alphabet and Microsoft aren't doing their part to help the market much since the latest move higher began last week, the Strategas technical and macro research team led by Chris Verrone said in a note Monday.

By contrast, financials and consumer discretionary stocks have improved lately, but aren't yet dominant, Strategas said. Although crude oil has been soft lately, "ConocoPhillips acts great," as does Albemarle and Ulta Beauty.

The continued rally for the stock market looks reasonably healthy in the short term, but it is probably too early to call for the all-clear, according to Jeff Mills of Bryn Mawr Trust.

"That 3,900 level on the S&P 500 is important technically, and the move that we saw off of it has been fairly strong at this point. I don't know if it is strong enough to call it a very clear reversal, but in terms of the breadth and strength of the bounce it has been reasonably encouraging," Mills said.

Investor positioning and economic data may have also helped the recent rally, Mills said, but the stubbornly high yields in the Treasury market are a cause for skepticism. The 10-year Treasury yield is up about 4 basis points on Monday afternoon, trading near 3.364%.

Ark Invest's Cathie Wood once again warned investors that deflation is on the horizon. The innovation-focused investor noted that a slew of commodity prices have fallen from their record highs, including lumber, copper, iron ore and oil. Wood recently predicted that deflationary forces will trigger a big policy reversal from the Federal Reserve in three to six months.

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