The market "set up" is important before "highly anticipated events."
From time to time we get a highly anticipated event in the market place. When this happens, the reaction in the stock market to the news that comes out of that “highly anticipated event” (like a key data point or an important speech/testimony) can frequently be determined by the “set up” in the markets BEFORE this event takes place.
For instance, a large decline in front of an “highly anticipated event” can soften the move in the markets after we get the actual news from that “event” if the news is bearish. It can also create an outsized rally if the “news” is much more bullish than expected…..On the flip side, if the market has seen a strong rally just before the “highly anticipated event,” it doesn’t leave the market a lot of upside potential if the news is bullish…and leaves it vulnerable to an outsized decline if the news is surprisingly bearish.
The recent "set up" limits near-term upside potential.
Of course, if there isn’t much movement before these highly anticipated events take place, the reaction can still be a big one if we get a big surprise, but that’s not the situation we’re facing right now. The “highly anticipated event” we’re facing right now is tomorrow’s speech from Fed Chairman Powell in Jackson Hole. The stock market has rallied 3.5% over the past week, so it sure looks like the market is already pricing-in a decent amount of bullish news from Mr. Powell.
Therefore, we believe the upside potential over the short-term is likely to be limited. No, this does not mean we’ll get a “sell the news” reaction if Mr. Powell’s comments are uber dovish…nor does it guarantee that we’ll see a sharp decline if he disappoints investors once again. However, we believe it’s important to consider the “set up” in the market place right now when considering any short-term investment decisions. (Of course, maybe the algos can help take the market a lot higher if his comments are quite dovish. However, since algos only get the blame for declines…and never the credit for advances…we won’t hear anything about them in that scenario.)
The ITB home construction ETF is breaking out of a key technical pattern.
Anyway, as we wait for tomorrow’s “highly anticipated event,” we’d like to highlight one development from the bullish side of the bull/bear ledger. With interest rates at ultra-low levels (and thus mortgage rates at similarly low levels) the ITB housing ETF is finally breaking out. We were worried about this group because the ITB had been forming a “rising bearish wedge”. However, this week it has broken out of that pattern to the upside…thus negating its bearish potential. Of course, we want to see this ETF to stayabove this pattern (and move more meaningfully above it) to confirm the breakout, but there is no question that this is a positive move for the group on a technical basis. (In other words, we want to guard against an “head fake,” but this is a bullish technical development.)
Looking at a longer-term chart, there is another reason to like the housing stocks right here. During the deep 4th quarter correction of last year, the ITB fell below its trend-line from the 2016 lows. However, it was able to regain that line in March. Since then, it has been able to hold above that line…so the fact that it is now breaking-out to the upside after holding that line is also quite positive.
With the economy slowing, there are certainly reasons to be worried about the housing market (especially in certain parts of the country). However, the technical picture for the group is looking good…and any upside follow-though will make it look even better!