Pulse of the Markets Report 8/16/23: Lack of "Buy-the-Dip" Momentum Evident in August

The current activity in equity futures trading lacks strong conviction, partly due to a cautious approach by market participants towards embracing the "buy-the-dip" strategy. This hesitation stems from the recognition that this approach hasn't yielded positive results in the current month.

Presently, the S&P 500 futures are showing a decline of nine points, trading 0.2% below their fair value. Similarly, Nasdaq 100 futures are down 36 points, also trading 0.2% below their fair value. The Dow Jones Industrial Average futures are down 55 points, reflecting a 0.2% dip below fair value.

While certain stocks, like NVIDIA (NVDA), have rebounded after a prolonged period of weakness, the broader market indices have not experienced any "buy-the-dip" momentum throughout August. As of today, the Russell 2000 has seen a decline of 5.4% this month, the Nasdaq Composite is down 5.0%, the S&P Midcap 400 has dropped 3.7%, the S&P 500 has retreated by 3.3%, and the Dow Jones Industrial Average has slipped by 1.7%.

It's worth noting that these declines follow a robust streak of gains for the overall market. Therefore, the August pullback is viewed as a standard consolidation phase during a historically weaker period.

Furthermore, the selling activity this month has occurred with relatively low trading volume, indicating a lack of strong conviction among sellers. Notably, buyers have shown disinterest for various reasons, ranging from concerns about valuations to unease over interest rates, and even vacation plans.

Throughout this August pullback, market discussions have predominantly revolved around disappointing economic activity in China and the upward movement of U.S. market rates, both of which are impacting today's trading environment.

China reported a 0.1% year-over-year decrease in home prices for July, adding to a series of underwhelming economic data. Meanwhile, the yield on the 10-year Treasury note has inched up by one basis point to 4.23%, approaching the significant 4.25% high-yield mark observed last October.

Technical traders are closely monitoring the Treasury market, and a similar focus is directed toward the stock market, especially after the S&P 500 closed below its 50-day moving average (currently situated at 4,449) in the previous session.

The hesitance observed in equity futures trading this morning could likely be attributed to a wait-and-see approach regarding how the cash market reacts to this critical technical level. The question at hand is whether the market will swiftly regain a position above this mark or if it will continue its downward trajectory.

In essence, investors are pondering whether it's advantageous to capitalize on the dip by buying or if it's more prudent to reduce their positions.

Fortunately, housing starts and building permits remained steady in July. Total housing starts experienced a 3.9% month-over-month increase, reaching a seasonally adjusted annual rate of 1.452 million units. Building permits rose by 0.1% month-over-month, reaching a seasonally adjusted annual rate of 1.442 million.

A noteworthy aspect of the report is that the growth in starts and permits, while modest, primarily stemmed from single-family units. This is particularly crucial in a constrained existing home market where the supply is in high demand.

Later in the day, at 9:15 a.m. ET, the July Industrial Production and Capacity Utilization Report will be published, followed by the release of the FOMC Minutes from the July 25-26 meeting at 2:00 p.m. ET.

In terms of earnings, both Target (TGT) and TJX Cos. (TJX) have reported their quarterly results. Notably, both retailers exceeded earnings expectations, leading to an uptick in their stock prices during pre-market trading. This is especially significant for Target, as the company revised down its FY24 earnings and comparable store sales guidance.

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