For the last couple of weeks, the market has seen a surge in volatility as it has undergone some corrective action. Typically, August is a sleepy month for stocks as Wall Street takes a vacation and waits until Labor Day for making big moves into the end of the year. It has been different this time, which has contributed to a higher level of emotionality that has driven some big swings.
While there has been an ongoing reaction to the trade negotiations with China, what has really mattered most is the bond market. For the first time in years, the market did not celebrate lower rates. A rally in bonds and a crash in yields created more economic fear than optimism about the endless supply of cheap capital.
The question on the minds of market players has been, "if lower interest rates can't keep this market running higher, then what will"? That question has caused more concern about the health of the market than anything else since the recession of 2008-9.
On Monday morning, market players are setting aside that worry about the effectiveness of dovish central banks. In Europe, inflation was weaker than forecast; in China, benchmarking of loans to a "prime rate" is seen as a positive development; and in the U.S., expectations are growing that Federal Reserve Chair Jerome Powell will set the stage for a series of rate cuts when he speaks at Jackson Hole this Friday.
In addition to the renewed celebration of central banks, there also is positive rhetoric about the progress of trade talks with China. Market players are skeptical of the constant spin from the Trump administration, but no one wants to be caught leaning the wrong way when a real breakthrough finally occurs.
While the mood is upbeat Monday morning, the technical condition of the market is a mess. The lows of August were retested and held, but overhead resistance lurks at the 50-day simple moving average of the S&P 500 at 2945. Trading is still very thin as Wall Street remains on vacation but a Monday morning rally is creating some old-fashioned fear of missing out.
This market has plenty of potential obstacles, both fundamental and technical, but its inclination to celebrate friendly central banks is a major problem for the bears. We'll see how well the market holds on to these gains, but with Powell expected to set the stage for rate cuts on Friday at Jackson Hole, there is likely to be some underlying support.