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August Pullback in U.S. Stock-Market Rally


August is known for its volatility in the U.S. stock market, often experiencing the highest levels of volatility for the year. As vacation season comes to an end, trading conditions tend to see a decrease in volume. However, the recent 5.6% decline in the S&P 500 over 15 trading sessions in August is considered worse than usual.

Tom Lee from Fundstrat acknowledges the severity of the pullback but suggests that it is just a typical August phenomenon. Lee believes that the sell-off is grounded in known and logical reasons.

These reasons include a 50 basis point increase in the 10-year Treasury yield, leading to a 15-year high. Additionally, there has been a rise in the U.S. dollar and an awaited surge in the Cboe Volatility Index.

At present, both the S&P 500 index and Nasdaq Composite are on track for a third consecutive weekly loss, while the Dow Jones Industrial Average is facing a 2.2% weekly decline.

For the slide to turn into a significant rout, Lee notes that yields would need to pose a threat of “breaking something” or an external shock must occur. Examples of such shocks could be a 10% surge in oil prices or an increase in wage pressures, leading investors to question whether inflation will continue to decrease.

While the August pullback may be concerning, it is important to analyze the underlying factors and observe how they contribute to the market’s overall performance.

Learn more about why Treasury yields keep rising, which has been causing pain for stock-market investors.

Signs of Stability in the Market

The current focus of investors is on rising bond yields, which are impacting price-to-earnings ratios, and the potential for more interest rate increases by the Federal Reserve due to a strengthening U.S. economy. Additionally, concerns about China’s weak economic data and property issues are also weighing on the minds of U.S. investors.

The Importance of Bond Yields

According to one strategist, bond yields hold the key to the market’s emotional state, as they have the power to quickly influence market conditions. However, there are indications that stability may soon return.

Historical Patterns

The strategist noted that while the surge in the 10-year yield is currently affecting stocks, similar jumps in the past have often signaled the end of a selling cycle for equities. The previous instances of yield jumps that occurred on September 23 and March 2 of last year were followed by stocks reaching their lowest point within 8 to 16 days.

Technically Oversold Stocks

In addition to historical patterns, stocks are currently considered oversold from a technical perspective. The McClellan Oscillator, a gauge used to measure this oversold condition, has dropped to -50. This has occurred only 39 times since 1990, and in 51% of those instances, stocks reached their bottom within five days. In 72% of cases, stocks bottomed within 15 days.

Upcoming Dates to Watch

To determine the market’s next move, investors will be closely observing two important dates. First, on August 24, chip maker Nvidia Corp. will be reporting its fiscal second-quarter results. Last spring, Nvidia’s blowout results sparked an AI frenzy that led to significant gains for megacap tech stocks. Second, on August 25, Federal Reserve Chair Jerome Powell is scheduled to speak at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. It is worth noting that Powell’s speech at the same event last year marked the top of a bounce for the S&P 500, after which stocks declined by 19% over the following eight weeks.

While it remains uncertain how the market will behave in response to these events, the strategist remains cautiously optimistic, acknowledging that anything can happen.

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