@themarket: Markets in a Topping Process
Fed Chairman Jerome Powell indicated that he was "prepared to raise rates further" at the Jackson Hole Symposium this week. Investors who were hoping to hear a more dovish outlook were disappointed.
The market walked away with an understanding that interest rates had two paths forward. The best case was flat for a longer period, or higher if inflation persists. About last year's address, Powell said "The message is the same: It is the Fed's job to bring inflation down to our 2 percent goal, and we will do so."
Beyond Friday's event, it was a slow week with little volume and plenty of volatility. Second-quarter corporate earnings in the retail sector were lackluster for the most part with forward guidance indicating a slowing in retail spending on the margin.
On the economic front, data revealed further weakness in certain sectors, but the job market remained buoyant. The weakness in the U.S. Purchasing Managers Index (PMI) indicated that demand for new business in the services sector contracted. This followed a bigger-than-expected decline in Euro Zone PMIs as well as slowing growth in China. All this data indicates that inflation may continue to fall but most of the downward pressure could be due to a softening economic picture in Europe and China.
The most important event of the week, aside from Powell's comments, revolved around an individual company, Nvidia, the semiconductor giant. Nvidia is the world's leader in the manufacture of Artificial Intelligence (AI) microchips. It commands an 80 percent market share worldwide. Many Wall Street analysts believe we are just at the beginning of an enormous multi-year demand for AI chips that will benefit Nvidia enormously.
Following a blockbuster May earnings report that rocked Wall Street and sent the stock soaring up 200 percent this year, Thursday's second-quarter earnings announcement blew away what were already sky-high expectations. The company reported a 101 percent jump in sales from last year, while earnings were up 429 percent. They also guided higher revenues for the coming quarter that was $3.5 billion higher than the loftiest estimates.
However, sometimes there is a difference between a company's fortunes and what happens to its common stock. The stock price had been bid up relentlessly for weeks before the earnings results. The earnings did catapult the stock higher after the announcement in the pre-market hours by 7 percent.
It took most of the market higher with it and dragged the tech-heavy NASDAQ up over one percent. And then boom, both the stock and the market tumbled shortly after the opening.
In hindsight, (as often happens in trading) all the good news was already discounted in the stock price. There was nothing left to do but sell on the news and that is exactly what traders did. Be aware, however, that this price decline has nothing to do with the fundamental value of the company and its prospects.
As for the markets overall, the S&P 500 index did give me the bounce I was looking for. It gained 2 percent this week before reversing back down. I believe we are in a topping process in the markets, which should continue into the second week of September. After that, I expect a bigger move down.