In this article:

• Lagging technology sector weighs on indexes
• Fed continues stirring up volatility across market
• Positive action to watch in retail sector

Volatility looks to be business as usual in the stock market this week.

All three major indexes were down to start the holiday-shortened week and more of the same is expected.

This follows the close of the month last week when the indexes finished lower.

Stock market indexes continue downtrend

August went out with a whimper last week as September opened on shaky ground.

The S&P 500 fell 3.3% along with a 4.2% loss in the Nasdaq last week.

The S&P 500 drop pushed the index below its 50-day simple moving average (SMA) which was the next area of possible support after the drop below 4,170 the week prior. The technology-laden Nasdaq also fell below its 50-day SMA highlighted by losses in semiconductor and software sectors.

The struggling FAANG stocks also weighed heavily against the two indexes. FAANG refers to technology companies that include Facebook (now Meta), Amazon, Apple, Netflix, and Google (now Alphabet). This group of stocks has suffered continued weakness throughout the year.

In the market today, the Dow closed at 31,145.30 points to fall .55% (dropping 173.14 points on the day). The Nasdaq dropped to 11,544.91 points for a .74% stumble while the S&P 500 lost .41% to 3,908.19 points.

Fed still stirring headwinds for market

News last week of increased job openings as well as strong non-farm payrolls in August sent stocks lower. A robust jobs market pushes the Federal Reserve (Fed) to hold an aggressive plan to raise benchmark interest rates in efforts to bring down 40-year high inflation.

The aggressive Fed policy stance has also pushed the U.S. dollar to a 20-year high due to foreign interest in higher bond yields. Investors seeing the dollar as a safe haven is another reason for increased demand.

The major indexes are struggling against headwinds fueled by Fed policy and economic demand. This is a key consideration when looking at the S&P 500 which houses the highest percent of multinational companies where a strong dollar reduces the value of revenues from goods that are sold overseas. Consider that all FAANG stocks are multinational companies, and these stocks make up the largest portion of valuation in the stock market.

All of these signals show the stock market still in a downtrend. Simpler’s traders are watching for any bounce this week due to oversold conditions on the broader indices, with the possibility of selling into any rallies.

Positive tickers emerge in chaos

There are some positive areas in this downtrending stock market.

Consumer discretionary sector stocks fell less than the broader market led by Amazon (AMZN). AMZN pulled back to its 50-day SMA, signaling a support level following news that the company will cut back on capital expenditures by halting construction on dozens of warehouse projects worldwide.

AMZN is on the team’s watchlist as one of the few mega-cap FAANG stocks finding support at its key 50-SMA.

A rise in consumer confidence for August along with better than expected earnings results helped boost select consumer discretionary areas. This included retailers such as Lululemon (LULU) and Dollar General (DG). Overall however, retail stocks are in a downtrend with the group now trading below the 50-day SMA.

Retail sector stocks are another area to watch.

“Retailers fall into the category of growth stocks which can be negatively impacted by rising interest rates,” said Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading. Select areas of retail are currently holding up well.”

Discount retailers such as Walmart (WMT), Dollar General (DG), and McDonalds (MCD) – which were among the top performers during the 2008 bear market and recession – are also holding relatively well.

“These names as well as other discount retailers that are on our watchlist will be closely watched as, historically, they can fare well during periods of a slowdown in the economy,” Mary Ellen said.

Fed and September a volatile combination

The Fed is still a concern for traders this week.

Historically Fed policy is one of the primary drivers of price action in the stock market. There are multiple Fed speeches this week, and the Fed has made clear intentions to continue an aggressive monetary policy until 40-year high inflation is under control.

Fed plans to push benchmark interest rates higher will likely push most stocks lower.

The July rally, even after interest rates were raised, was based on the market hope that the Fed would slow rate hikes as corporate earnings reports were better than expected. With the Fed determined to continue raising interest rates, the anticipation is there is a tough period ahead in September which has been the worst performing month going back more than 70 years.