Markets

US monetary policy is blooming grotesquely in the markets

The weekly initial US jobless claims yesterday were pretty much in line with expectations. The average estimate was 1 million, with 1.006 million applications actually reported, after a slightly revised 1.104 million the previous week.

Initial jobless claims in the US

Due to the current decline in initial applications, the 4-week average (green line in the graph) has also decreased further. But the situation on the labor market is still tense. Because the absolute number seems to be leveling off at around 1 million weekly initial applications and is thus around four times as high as before the crisis.

US consumer sentiment falls to 6-year lows

One result of this is that consumer confidence in the US, as measured by the Conference Board Consumer Confidence Index, has recently fallen to a level that was last reached in May 2014. The barometer slipped surprisingly sharply to 84.8 points in August, after 91.7 points in the previous month. Experts, on the other hand, had expected an increase to 93.0 points.

Consumer Confidence Conference Board

The sentiment of US consumers, on whose buying mood the US economy depends to more than 70%, has recently hit a six-year low. Consumers assessed both their current situation and the future as worse than in the previous month.

The US Federal Reserve made the inflation target more flexible

However, due to the US Federal Reserve’s glut of liquidity, the stock markets in the US do not reflect this. Instead, they continued their record hunt. They were supported yesterday by the eagerly awaited statements by the head of the US Federal Reserve at the (online) central bank symposium in Jackson Hole. Jerome Powell announced that the Fed wanted to make inflation targeting flexible. The Fed is aiming for its previous inflation target of 2% in the future only on average over time.

This means that monetary policy will remain expansionary and interest rates will remain low even if inflation in the US exceeds the previous target of around 2%. It is logical that this led to rising prices on the markets again.

Grotesque developments on the Nasdaq

On the Nasdaq in New York, however, this is now blooming grotesque. For example, Tesla has set out to become the seventh most valuable company in the United States. Against the background of the number of cars sold by the electric pioneer and the sales and profits generated with them, this can hardly be explained to a reasonable investor.

With such excessive market movements, the Nasdaq technology index is now so far removed from its 200-day line as never before in its history. (This also applies to the S&P 500.) The Nasdaq 100 (see chart below) has now gained almost 77% since the March low. The difference to the 200-day line (blue in the following chart) is currently 2,723 points or almost 30%.

Nasdaq 100 - Chart Analysis

Since the interim low on July 24th alone, the index has gained more than 16% in just over a month. In the corona crash, the index lost a little less than 3,000 points. Since then he has gained 5,262 points. These are actually unimaginable price movements in such short periods of time.

But you shouldn’t be blinded by it. Because it is still the case that the rise in the US indices is only supported by a few stocks and thus leads to extreme exaggeration and imbalance.

Euro STOXX 50 has been moving sideways for 3 months

In this country it looks a little different. August is actually one of the two worst months on the stock market of any year. Nevertheless, the DAX was also able to gain decent growth this month, by up to an impressive 7.4%. But the German benchmark index is still below its July high and thus also below the high that was marked in February before the Corona crash.

DAX - chart analysis

And the Euro STOXX 50 (see the following chart) performs even worse than the DAX compared to the US stock markets. This index is currently still 13.5% below its pre-crisis high. And it is trading below both July highs and early June highs. This means that there have been no profits here for almost three months (!) Because the prices only moved sideways during this time (yellow rectangle). This confirms that the rally in the US markets is currently being driven by special factors, namely only a few hyped stocks.

Euro STOXX 50 - chart analysis

After all, an ascending triangle (green and red line) can be seen in the Euro STOXX 50 with the price development of the past three months in addition to the sideways trend. And since both chart patterns are considered bullish trend continuation formations, an upward breakout is to be expected soon, which could even take place quite dynamically.

September is just around the corner

However, it remains to be seen whether this will happen. After the stock market month of August went significantly better than the long-term average, September is now the second of the two statistically worst stock market months just around the corner.

DAX - seasonal

And if the US markets do go into a major correction, the Euro STOXX 50 will most likely not be able to escape this. In the worst case, the ideal-typical upward outbreak will occur by then, which then may turn out to be a sneaky bull trap.

So there are good reasons to be careful …

I wish you good trading success
your
Sven Weisenhaus

(Source: www.stockstreet.de)

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