In this article:

• Market faces leadership challenge
• What economic data to watch this week
• Fed comments continue to agitate market

The stock market faced a rough hangover to start the week following the sharp selloff caused by federal policy announcements on Friday.

The market opened down Monday, recovered, gapped down, and then started regaining some composure heading into midday.

Will this market be able to clear its head after the Federal Reserve (Fed) openly stated it will continue aggressive monetary policy indefinitely?

Our traders expect this market to continue struggling near term.

Stock market feels effects of Fed comments

The market may be headed for a retest of the June lows for the year.

Sam Shames, Vice President of Options at Simpler Trading, expects a further test lower to the weekly chart 200-day simple moving average (SMA) on the S&P 500 (SPY). He’s watching for the possibility of the SPY moving toward $340 before the Fed effect is all done.

“This is because the market has no actual leadership,” Sam said. “The yield curve is inverted, central banks are tightening, and most importantly the Fed is starting balance sheet reduction

in September.”

He expressed frustration at ongoing Fed action and how it affects the benchmark interest rates and the overall U.S. monetary balance sheet.

“Infinite supply and no demand on these financial instruments will result in equity

markets repricing much lower,” Sam said.

As the selloff Monday morning continued, Sam shared how he is seeing more new monthly squeezes in play now. He is reading these long-term squeezes as bearish.

Sam is seeing short moves across indexes, sectors, and stocks in the near term. He is watching for bounces that could lead to short plays using longer dated options contracts.

“The beatings will continue until morale improves,” Sam said.

Market morale may take more hits this week with more economic data releases.

Data releases to watch this week:

• Tuesday – U.S. Job Openings and Labor Turnover Survey (JOLTS); U.S. Consumer Confidence Index
• Wednesday – ADP National Employment Report
• Thursday – U.S. Manufacturing Purchasing Managers Index (PMI)
• Friday – U.S. nonfarm payroll employment numbers.

S&P 500 drops below key trend level

When the S&P 500 fell 4% to close last week, the move put the index back below the 4,170 level which has been a key area in determining the near-term trend of the markets.

“This puts the markets in a negative near-term position,” said Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading.

Mary Ellen pointed to the Nasdaq also falling further for the week with a 4.4% loss spurred by sharp declines in semiconductor, software, and retail stocks. Growth stock names sold off in these sectors.

Technology suffered as well. Apple, Inc. (AAPL) slumped last week with a 4.6% decline that puts the stock below its 21-day moving average. Most of the AAPL selling occurred on Friday and the volume was above average.

With recent Fed statements, Mary Ellen expects continued focus on any increases in yields which could continue to push growth stocks lower.

“A spike in the Volatility Index (VIX) last week points to increased anxiousness among investors which may also stall any upside potential,” Mary Ellen said.

Mary Ellen said one of the most concerning comments of Fed Chairman Jerome Powell’s statement was that restoring price stability will likely require maintaining a restrictive fiscal policy stance for some time.

The Fed wants to continue raising interest rates, slow economic growth, and soften labor market

conditions in its efforts to bring down inflation.

“The remarks increased fears of a harder landing for the economy,” Mary Ellen said.

She expects volatility to remain elevated this week as market participants digest Powell’s

comments and evaluate the potential impact on the economy and the markets.

She expects growth stocks to remain susceptible to further weakness as they are poised to trade lower.

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