We waited over 360 days for a 2% daily pullback in the S&P 500 and got it a week ago. Then we got an encore last week as volatility erupted thanks to the busiest week of earnings and a Fed that left rates unchanged. 

The back-and-forth market action between the bulls and bears was as exciting as watching a Grand Slam tennis match. Sadly, the bears won this battle.

What do we do for an encore this week?

Well, things should calm slightly barring a major geo-political event. The calendar is light of significant economic data points. In fact, it’s possibly the slowest economic calendar of the summer. We are now 75% through earnings season and there isn't too much Fed speak.

So let’s tend to our minor flesh wounds from last week and focus on where we are.

We have an official “Correction”. The tech heavy Nasdaq 100 (NDX) (chart below) has now fallen over 10% from its recent peak marking correction territory. The S&P 500 is now 6.5% off of its peak. So what does this mean?

It means we are going through a normal market occurrence that happens on average once a year. When it happens though, it’s never fun and makes you question that maybe this time it’s different.

Here are just a paucity of reasons, without going too deep into the weeds, why it isn’t different this time.

Markets don't go straight up. Sometimes we pause, we retrace, we rotate when nothing fundamentally has changed. Reminds me of my favorite Jessie Livermore quote.

Earnings growth is there and expanding. The megacap names are still growing, but not at a rate to take their stocks a new leg higher this quarter. They had a great run, now they consolidate - see Nvidia last year from August to December, again in March/April and now.

We are experiencing normal, seasonal patterns. As we’ve written, August and September tend to be the toughest months, most bottoms occur in October and we rally in the 4th quarter of an election year. Nothing has changed to think otherwise.

The Fed, while upsetting the market by being slow to act, is now in a cutting cycle. They are cutting at a time while unemployment is just off historical lows. People are not putting that into the right perspective.

Sure the headlines will continue to be wild, especially during this election cycle, and that is why perspective is needed more than ever.

“Sahm Rule” Triggered. This is one of many economic rules that statistically has shown that a recession is imminent. In fact, it may be the best one.

Readers here know about this rule as we have discussed this in the past, but let’s review. The Sahm rule simply states that the onset of a recession is signaled when the three-month rolling average of unemployment moves a half-percentage point above the 12-month low for a three-month rolling average.

In the recent case, the low unemployment rate was 3.4%. This month we ticked up to 4.3%, thus, triggering the rule. Many debate that this time could be different, including me here in this segment on Yahoo finance with Jared Blikre.

Even Miss Sahm believes this time could be different. She discussed that with CNBC’s Kelly Evans here.

As for the Fed, she stated that “waiting two more months [to cut]...may make it harder to cut gradually and could create unwarranted urgency" to do so. After the market reaction to the unemployment numbers on Friday she reiterated the Fed should have cut rates this week, but did not say recession was a foregone conclusion despite her indicator suggesting just that.

Earnings Scorecard and Trends. Thanks again to John Butters of FactSet for providing this great weekly data. So far this earnings season, the percentage of S&P 500 companies reporting positive earnings surprises is above average levels. However, the magnitude of earnings surprises is below average levels.

As for those trends, overall the index is reporting its highest (year-over-year) earnings growth rate since Q4 2021. Looking ahead, analysts expect (year-over-year) earnings growth rates of 6.1% and 16.1% for Q3 2024, and Q4 2024, respectively. For the rest of 2024, analysts are calling for (year-over-year) earnings growth of 10.8%.

The Fed’s Next Move. There had been a 100% chance of a 25 bps cut in September prior to the Fed meeting last Wednesday. The odds of a 50 bps hike at the September 18th meeting were minimal. However, those odds of a 50 bps cut jumped to 30% on Thursday and as high as 70% after Friday morning’s unemployment numbers.

We don't get too many Fed speakers this week, but every word they say will be dissected meticulously. The biggest event before the Fed’s next meeting will be their annual Jackson Hole Economic Symposium from August 22-24.

The VIX Spike. Last week we saw the biggest surge in the VIX for 2024. The measure of volatility and fear has been a solid gauge during this bull run to signify market turning points.

Thanks to my friend Jake Wujastyk for sharing the following chart overlaying the spikes in the VIX with recent bottoms in the SPY. The last four occasions where the VIX spiked over 20 we have put in a low, or very close to it.

On Friday the VIX spiked as high as 29.66 before closing at 23.39.

Earnings. We have now gotten reports from 75% of the S&P 500 as we head down the home stretch of earnings season.

Stocks in Focus

We have seen some stocks start to break down ahead of this week’s earnings results. Is this foreshadowing for what’s to come, or can they rebound with a good result?

Palantir Technologies (PLTR) has been one of the most volatile stocks after reporting earnings. The AVERAGE move since its 2020 debut is +/- 15.4%. The last three have seen a loss of 15% and gains of 31% and 20%, respectively.

Shares are currently up 44% year-to-date but trading 17% below 52-week highs. Will Monday afternoon’s results push it back towards those highs or, like many of its tech counterparts, will it give back some of those YTD gains.

Technically, we had a nice bullish set-up, but lacked confirmation of a continued bull run. In fact, shares just broke down over the last two days and need to quickly rally to get back into its bullish set-up. Shares had broken out to new 52-week highs in early July, but failed to hold above its key support/resistance area of $27.50.

While the stock remains in a solid long-term uptrend, recent activity leaves it on shaky ground. Price action ahead of the results is not a positive development for the bulls.

Uber Technologies (UBER)

Shares have traded higher after six of the last 8 reports, but have struggled over the last several months. Shares are -24% off their March peak and now down -4.2% YTD.

Technically, shares have appeared to rollover and are at a critical level coming into this report. The stock is trading under its 200-day moving average for the first time since January 2023. This is a good barometer of the overall trend and it is in need of a healthy dose of solid earnings to get back on track.

Shares were holding onto to its long-term uptrend going back to January, 2023. Then we hit August and shares broke down

Watch a potential downside to $50 if results fall short. A positive reaction to results should see shares get back above $62, but there’s much resistance above this level and shares may struggle to get back above its major moving averages.

Disney (DIS) has been a very frustrating stock for its shareholders. Each time one thinks the worst is over, it finds a new way to trade lower. Once Nelson Peltz divested his activist stake and walked away shares have plummeted over 25%.

Shares dropped -9.5% after last quarter’s earnings and have been sliding until they got a short-lived bump last week with great box office results from Deadpool & Wolverine.

Technically, shares closed right at a major support level going back to its lows of the year. Any further weakness could see shares go through the gap (shown in pink) and retest the lows around $78.

Any strength and watch the longer term downtrend around $94. That has been in place since early April and may be tough to get through.

Economic Calendar

Monday - ISM Services 10:00

Tuesday - U.S. Trade Deficit 8:30

Thursday - Jobless Claims 8:30

The market had a very simple message for the Fed and Jay Powell last week. In layman’s terms - you messed up, you should’ve cut rates.

After deciding to leave rates unchanged despite inflationary numbers that continue to trend towards their 2% goal and unemployment that started trending higher, they stood idly by waiting for more economic data to dictate their next move.

Sadly that next big data point came on Friday, two days after their meeting, in the form of July’s unemployment numbers. If the Fed knew about the tick up and subsequent market reaction, then maybe they would’ve pulled the trigger and cut.

They didn’t. As a result we went on a wild ride to end the week and kick-off the always volatile month of August. Let’s review…

Fed Decision. No cut as anticipated. What about the language?

The language softened at this meeting compared to the last which seems to be setting the stage for a rate cut. They lowered the jobs outlook saying things “moderated” instead of “remained strong” and unemployment “moved up but remains low” adding in “moved up”.

So they acknowledged the softening of the labor market, in fact in an uncharacteristic move he discussed that topic first instead of inflation concerns. They noted a better balance to achieving its employment and inflation goals and said they are “attentive to the risks to both sides of its dual mandate”.

During his press conference, he said a rate cut is “on the table” and we learned some on the committee discussed cutting in July at this meeting. He was asked about the Sahm rule and acknowledged it as a statistical regularity, but not a certainty.

However, all of this was BEFORE that important July unemployment report. We know in hindsight that the rule has been triggered and the labor market is showing signs of cracking. That brings us to…

The July Unemployment Report. Job growth for July was much less than expected as the unemployment rate rose to 4.3% which was greater than the estimate of 4.1%.

The softening trend grew more into a concern as estimates fell short of the reality. Continuing claims - those still out of work looking for a job, continue to climb. Meaning it is becoming more challenging to find a job.

As you can see in the chart above, the number of jobs created (in green) continues to decrease, while the unemployment rate has ticked higher for the last four months.

July Recap. This almost seems irrelevant given the action over the first two days of August, but let's take a look back at July’s winners and losers.

The S&P 500 gained roughly 1% over what was quite a volatile month. It was a mixed group of sectors leading the charge as global flooring giant Mohawk Industries (MHK) took the top spot gaining over 46%. Power tool company Stanley Black & Decker (SWK) was second with a 36% gain followed by home builder DR Horton (DHI) with a 31% rally.

No surprise to see Crowdstrike (CRWD) at the top of the loser board. The cybersecurity company’s snafu wreaked havoc on the airlines and some of their other large customers. Shares dropped -41% over the month. Dexcom (DXCM) lost roughly -40% after a big earnings miss and a report they were being investigated for securities fraud.

The Dow Jones Industrial Average gained 4.3% in July. Solid earnings from 3M (MMM), United Health (UNH) and Goldman Sachs (GS) helped propel them to the top of the monthly class.

The hardest hit stocks also fell on earnings that didn’t wow the street. Merck (MRK), Microsoft (MSFT) and Amazon (AMZN) all struggled to have a positive July.

The Nasdaq 100 lost -2.3% in July. We saw similar leaders on the loser board as we saw in the S&P 500 as many of these names overlap.

The biggest two winners were in the communications space as Charter Communications (CHTR) and Warner Bros Discovery (WBD) led the winners.

The Good…

McDonalds (MCD) and Starbucks (SBUX). Both beaten down consumer discretionary names were hoping that positive results could turn their fortunes around. Well, they didn’t get the positive earnings beats they were hoping for, but investors gave them a vote of confidence buying shares as if the worst news in the stocks may be behind them.

MCD rallied 9.8% on the week as they were optimistic that their value meal deals would help customer traffic. I discussed that topic here on the Schwab Network. While SBUX managed to gain 2.5%.

Shake Shack (SHAK) rallied 20% last week after topping analyst estimates. They have been able to navigate a tough consumer environment and outshine its competition.

The Bad…

Merck (MRK) cut their earnings outlook despite beating on both the top and bottom lines. Shares dropped over 8% for the week but remain up 7% year-to-date.

Chevron (CVX) missed their numbers on second quarter profits due to lower refining margins. They face potential headwinds as their deal with Hess is being delayed by an arbitration case and regulator scrutiny. They also made news by announcing they would be moving their headquarters from California to Texas.

Shares of the oil giant fell by roughly 6% last week as their rival ExxonMobil (XOM) beat the street and saw shares remain flat in a tough tape for energy stocks.

The Ugly…

SnapChat (SNAP) shares dropped by over 25% after reporting revenue results that missed analysts expectations as well as guidance that disappointed the street. Shares closed at $9.35, its lowest level of the year.

Disaster of the week - Intel (INTC). Ouch. The once mighty chipmaker had it worst day in my lifetime - and I’m old. Shares plunged 26% on Friday after they missed earnings expectations, guided lower and cut their dividend.

The company also announced cost cutting measures as they plan to cut 15% of their workforce. Sadly, that news didn't help stop the deluge of selling. Shares of the stock, which is somehow still in the Dow Jones Industrial Average, are at their lowest levels since 2013.

Heat Map. A sea of red engulfed most of the technology sector as software and semiconductor stocks suffered some significant losses. Also giving back some recent gains were the financials as they started off August with a whimper.

The communications sector had a nice week thanks to T-Mobile (TMUS) and Meta reacting positively to strong earnings. Also utilities and healthcare were positives in a tape dominated by some negative headwinds.

So much for rotation within the indexes. All four major indexes took it on the chin last week with the Russell 2000 (RTY) giving back a majority of its recent gains. The Dow snapped a four week winning streak as it suffered its worst day since February 2023 and dropped -2.7% over the last two days of the week.

The S&P 500 only dropped 2.1% on the week and took over the top spot for year-to date gains in the indicies. Despite the 3.2% drop over the last two days, it is still higher by 12.1% year-to-date.

July facts. Last month will go down as the month of rotation. While the S&P 500 was relatively flat for July, the story of the month was the bifurcation between the megacap tech stocks in the Nasdaq 100 and the small caps of the Russell 2000.

As seen above, the indexes experienced a total reversal of fortune. At one point on Wednesday, both indexes were less than one percentage point apart for year-to-date gains. For the month, the Russell gained just over 10% while the Nasdaq 100 lost 2%.

Defensive sectors in Utilities (XLU), Real Estate (XLRE) and Staples (XLP) experienced rallies as investors poured out of technology and discretionary names in droves. Utilities (XLU) were the big winner with a gain of 4.3%.

Overall, remarkably, five of 11 sectors finished higher. Energy (XLE) was the surprise given geo-political headlines that usually drive up the price of oil. Technology (XLK) was hurt again by weakness in the semiconductors and Discretionary (XLY) was hurt by drops in Tesla and Amazon.