Stock Market Regains Bullish Edge: Can Geopolitical Tensions Change Its Direction?

There's one trading day left for the month of September. Unless something drastic happens over the weekend, the stock market looks like it has bucked the September seasonality pattern of being the worst trading month for equities. That's not to say seasonality doesn't work; in the early part of the month, after all, there was a dramatic pullback. But the stock market has recovered and is now moving higher.

A handful of data this week stoked the stock market. The US economy continues to grow, the labor market appears to be moving toward a better supply/demand balance, the Federal Reserve made its first interest rate cut, and inflation is cooling. But the biggest news was the China stimulus decision. That was a surprise and sent Chinese stocks and ETFs soaring.

The August personal consumption expenditures (PCE) indicated that inflation is coming down and getting closer to the Fed's 2.0% target. This isn't a surprise, but it helped keep the optimistic sentiment going, at least into the first half of Friday's trading.

The Dow Jones Industrial Average ($INDU) hit a record high, sold off in afternoon trading, and eked out a record close. The S&P 500 ($SPX) and Nasdaq Composite ($COMPQ) also sold off on Friday, closing in the red. Despite the selloff, the overall trend in equities is still very bullish.

An Analysis of the Broader Stock Market Indexes

Although the S&P 500 closed lower on Friday, the S&P 500 Equal Weighted Index ($SPEW) closed slightly higher (see chart below).

CHART 1. S&P 500 EQUAL-WEIGHTED INDEX.

$SPXEW is trading well above its 20-day simple moving average. Its relative strength index (RSI) is just below 70, which means it has a lot of upside room.

This could mean that investors are shifting away from large-cap tech stocks and into other areas. The rise in the Dow Jones Average this week indicates that perhaps investors are rotating into Industrials and Materials. Small and mid-cap stocks also closed higher on Friday.

China-related stocks continued their bullish move on Friday. The iShares China Large Cap ETF (FXI) is getting pretty close to a resistance level. If it breaks above it on strong momentum, it would be worth allocating a portion of your portfolio to the ETF.

Then, There Are Bonds

After the Fed cut interest rates, US Treasury yields rose and bond prices pulled back. The August high in the chart of the iShares 20+ Year Treasury Bond ETF (TLT) is one to watch. If TLT breaks above this level (green horizontal area), bond prices could rise.

CHART 2. DAILY CHART OF TLT.

On Friday, TLT reversed after Thursday's doji candle. However, Friday's candle was also a doji, which failed to break above its 21-day exponential moving average. One day's action doesn't make a trend, but, in light of future interest rate cuts, there may soon be a buying opportunity in TLT. If you are already in bonds, like I am, then you could add to your positions after a breakout. This is one chart I'll be looking at.

Of course, this could change if next week's data doesn't support an upward move in bond prices. Next week, there will be a lot of employment data and several speeches from Fed officials, including Chairman Jerome Powell.

The jobs data will show whether the labor market is tightening or loosening and could steer investor expectations about further interest rate cuts by the Fed. According to the CME FedWatch tool, the probability the Fed will cut rates by another 50 basis points is 54.8%. If the labor data supports a 50 bps cut, that probability could rise higher.

Metals Keep On Shining

The price of gold pulled back on Friday after a series of "all-time high" closes. Central banks continue to purchase gold and add it to their global reserves. Gold and silver prices have rallied this year, and interest rate cuts by the Fed, plus China's recent stimulus measures, keep sending prices higher. Copper is another commodity that has benefited from China's stimulus news.

One commodity that wasn't rallying like the metals was crude oil. Oil prices saw massive declines this week but turned around on Friday afternoon. Geopolitical tensions that surfaced may have been the reason for the price turnaround. The Energy sector, which has been the laggard of late, was the top-performing S&P sector on Friday (see Friday's MarketCarpet). It occupies very little real estate on the MarketCarpet, but it's the greenest of the sectors.

FRIDAY'S S&P SECTOR PERFORMANCE.

While most of this week's news was positive, we ended on a slightly uncertain note—the surfacing of geopolitical tensions in the Middle East. The CBOE Volatility Index ($VIX) inched up slightly. China's stock exchanges will be closed most of next week in honor of China National Day, so there may be sideways movement in Chinese-related stocks and ETFs. There's still plenty of US data to focus on, so keep an eye and ear tuned to the market. More importantly, keep an eye on the rotation. The StockCharts MarketCarpets are a great starting point.

End-of-Week Wrap-Up

• S&P 500 closed up 0.62% for the week, at 5738.17, Dow Jones Industrial Average up 0.59% for the week at 42,313; Nasdaq Composite closed up 0.95% for the week at 18,119.59
• $VIX up 4.48% for the week, closing at 16.87
• Best performing sector for the week: Materials
• Worst performing sector for the week: Health Care
• Top 5 Large Cap SCTR stocks: Insmed Inc. (INSM); Applovin Corp (APP); Carvana (CVNA); Vistra Energy Corp. (VST); XPeng, Inc. (XPEV)

On the Radar Next Week

• Fed Chair Powell speech; speeches from Bowman, Bostic, Cook, and other Fed officials
• August JOLTS Job Openings
• ADP Employment Report
• Weekly Jobless Claims
• September ISM Manufacturing PMI
• September ISM Services PMI
• September Non-Farm Payrolls
• Nike (NKE) Earnings

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.