Stocks plunged after Nvidia (NVDA) fell by 9.5% on reports that the US Department of Justice subpoenaed the chipmaker over complaints that it is violating antitrust laws. (Quartz)
Weak US and China manufacturing activity has also been cited as a cause for market bearishness, but that seems unlikely.
Stocks
Selling in Nvidia [cerise] soon spread to other big-name stocks, with all seven mega-caps closing lower on Tuesday.
The fall breached short-term support on the S&P 500 at 5550, signaling a correction to test 5400.
The equal-weighted index ($IQX) retraced to test support at 7000. Trend Index troughs above zero indicate longer-term buying pressure. Breach of support would offer a target of 6800, but respect is as likely to confirm our target of 7400.
Small caps also weakened, with the Russell 2000 iShares ETF (IWM) breaching support at 215 to indicate another test of long-term support at 200. A Trend Index peak at zero warns of selling pressure.
ISM Manufacturing
The ISM Manufacturing PMI edged up to 47.2% in August. Although the cyclical sector is a relatively small percentage of the overall economy, it has a disproportionate impact during recessions as it sheds a large number of jobs. This is the sixth consecutive month of contraction (below 50), but the uptick indicates the contraction is slowing.
New Orders are also contracting, indicating further headwinds ahead.
Also, the Prices sub-index continues to expand, warning of persistent inflationary pressure.
However, the bearish outlook for manufacturing is offset by solid growth in other cyclical sectors, with combined employment in manufacturing, construction, and transport & warehousing reaching 27.85 million.
Non-residential construction spending continues to strengthen even when adjusted for inflation, benefiting from government programs to re-shore critical supply chains.
China Manufacturing Activity
The official National Bureau of Statistics manufacturing PMI for China fell to 49.1 in August, indicating contraction. However, the downturn is contradicted by a rise in the private sector Caixin PMI to 50.4%:
Financial Markets
Credit markets still reflect easy financial conditions, with Moody’s Baa corporate bond spread at a low 1.69%. Spreads above 2.5% indicate tight credit.
However, Bitcoin has respected resistance at $60K [red line], warning of shrinking liquidity.
Treasury Markets
Ten-year Treasury yields are again testing support at 3.8%. Trend Index peaks below zero warn of long-term selling pressure. Breach of support would indicate another attempt at 3.7%.
Low LT yields are bearish for the Dollar and bullish for gold.
Dollar & Gold
The recent rally in the Dollar Index is losing steam. Tuesday’s weak close suggests another test of support between 100 and 101.
Gold is retracing to test support at $2,475 per ounce. Trend Index troughs high above zero indicate long-term buying pressure. Respect would indicate another advance to test $2,600. Breach is less likely but would warn of a correction.
Silver is more bearish, and a breach of support at $27.50 per ounce would test the August low at $26.50.
Energy
Brent crude broke support at $76 per barrel and is headed for a test of long-term support at $73.
Nymex WTI crude similarly broke support at $72 per barrel, offering a target of $68. We expect the DOE to increase purchases to re-stock the Strategic Petroleum Reserve below $70, providing support for shale drillers whose margins are squeezed at these levels.
Uranium
Uranium continues its downtrend, with the Sprott Physical Uranium Trust (SRUUF) headed for another test of support at 17.
However, we are bullish on the long-term prospects as resistance to the expansion of nuclear energy fades.
Base Metals
After its recent rally, copper is testing short-term support at $9,000 per tonne. Breach is likely and would warn of another decline as China’s economy slows.
Aluminum leads the way, breaking short-term support to warn of another test of the band of long-term support between $2,100 and $2,150 per tonne.
Iron & Steel
Iron ore recovered above $100 per tonne, but respect of the descending trend line would warn of another decline. Reversal below $100 would confirm our target of $80.
Conclusion
Investors are jumpy as mega-cap stocks trade at inflated prices, boosted by passive investment inflows from index ETFs. We expect the S&P 500 to find support at 5400 and maintain our target of 6000 before the end of the year.
One factor that could upset the apple cart is tightening liquidity. However, the Fed and Treasury will likely support liquidity in financial markets, at least until after the November elections. If they withdraw support, then all bets are off.
Falling crude oil prices will likely ease inflationary pressure, while a slowing Chinese economy is expected to add deflationary pressure. Long-term interest rates are expected to remain low, weakening the Dollar. Gold will likely benefit, with another attempt at our target of $2,600 per ounce.