The market had a strong rally during the first couple of trading days, drifted a little higher, and then basically spent the rest of the month moving sideways.
That does not mean there was nothing going on underneath the surface.
There was continued rotation inside technology, semiconductors remained relatively weak, software stocks bounced, long-term interest rates pushed higher, and commodities continued to strengthen.
For now, I am still constructive on the stock market. But there are a few things I am watching pretty closely going into September.
The S&P 500 Is Still Holding Up
The main level I continue to watch on the S&P 500 is around 7,600.
That area lines up with the gap support from the beginning of August and the breakout above the previous all-time high.
As long as the market stays above that area, I think the trend remains constructive.
The Nasdaq is a little less clean, but I am looking at it the same way. On the QQQ, the important area for me is around 700.
As long as those levels continue to hold, I am not seeing enough evidence to become overly concerned about the broader market.
Could that change? Of course.
But right now, the trend still looks like bottom left to top right.
Rotation Inside Technology
One of the more interesting things happening right now is the rotation inside the technology sector.
Semiconductors have been losing relative strength since their peak in June.
Some shorter-term momentum strategies have already started rotating out of semiconductors and into software stocks, which had been beaten up pretty badly.
Software stocks had a roughly 44% drawdown from last fall into the spring as investors started pricing in the idea that AI was going to disrupt the entire industry.
At least for the time being, the idea that every software company was going to zero has not exactly played out.
Software has had a pretty good rebound over the last several weeks.
This matters because technology has become such a large part of the S&P 500.
You can have money moving out of semiconductors and into software without necessarily causing the overall technology sector to decline very much. The money is still staying inside tech.
That is another reason why I continue to view a lot of what we are seeing as rotation rather than broad deterioration.
The Average Stock Still Looks Fine
Equal-weight stocks continue to look constructive.
Value stocks continue to look constructive.
Some of the more defensive areas of the market have actually weakened over the last few weeks, which I view as a positive.
If we are going to have a healthy market advance, I would rather see the offensive parts of the market leading and defensive sectors lagging.
Consumer discretionary and communication services are still a little weaker than I would like to see, so I am watching those.
But as long as technology continues to lead and the average stock continues moving higher, I am not overly concerned.
Volatility Is Not Flashing a Warning Yet
I continue to watch volatility closely.
One of the warning signals I look for is a divergence between the S&P 500 and the VIX.
If the S&P is making higher highs but volatility starts making higher lows, that gets my attention.
We saw that type of divergence before some previous market declines.
Right now, we are not seeing it.
VIX futures continue making lower lows. If you invert that chart, it is making new highs along with the stock market.
That tells me there is still not a whole lot of fear being priced into the market.
I would become more concerned if the S&P continued higher while volatility stopped confirming the move.
So far, that has not happened.
Interest Rates May Be the Most Important Chart
The bond market is probably the biggest thing I am watching right now.
On paper, bonds managed to eke out a small gain in August.
That is a little misleading.
The 10-year Treasury yield finished the month around 4.76%, near a new 52-week high.
The 30-year yield continues testing the area around 5.15%, which has repeatedly drawn attention from policymakers.
My view is pretty simple.
I believe in markets.
I think markets are generally better at setting prices than policymakers are, whether we are talking about stocks, commodities, interest rates, or a loaf of bread.
Right now, the long end of the Treasury market is telling us something.
If the 30-year yield can break decisively above this area, I think it could eventually move considerably higher.
On the other hand, if it fails here, drops back below that breakout level and begins moving lower, we could have a failed breakout.
And as I have said many times before, from failed moves come fast moves.
That could create a very different setup for bonds.
The Bond Market Still Thinks the Fed Is Too Loose
The two-year Treasury yield remains one of my favorite charts.
Historically, the Federal Reserve tends to follow the two-year yield rather than the other way around.
Right now, the two-year continues to trade well above the Fed funds rate.
My interpretation is that the bond market still thinks monetary policy is too loose.
If the two-year continues toward the 5% to 5.5% area, I think the probability of another rate-hiking cycle increases.
That obviously has implications for stocks, bonds, housing, borrowing costs, and valuations.
It is one of the reasons I think investors need to pay very close attention to the bond market over the next several months.
Commodities Keep Getting More Interesting
The other major trend I am watching is commodities.
Energy continues to move higher.
Gasoline prices remain strong.
Crack spreads remain elevated.
Gold and silver look like they may be trying to dig in around important support levels.
Base metals such as copper and aluminum continue to look constructive.
Agricultural commodities are also making new highs.
When I look across energy, precious metals, base metals, and agriculture and see most of them moving from bottom left to top right, my inclination is not necessarily to get too cute picking individual commodities.
Sometimes the easier answer is simply to own the broader trend.
That is why broad commodity exposure remains interesting to me.
Agriculture Could Become a Bigger Story
Agricultural commodities may be one of the stories that gets more attention over the next several months.
Corn, wheat, soybeans, sugar, coffee, and cattle have all been moving higher.
There are several potential reasons.
One is the possibility of additional disruption related to the Russia-Ukraine war.
The other is weather.
If we do get significant weather disruptions over the next several months, that can obviously affect crop production and prices.
Whether the market has already priced some of that in is impossible to know.
But right now, the trend is higher.
That is what I care about.
Commodities Are Still Historically Under-Owned
Another reason I find commodities interesting is where they stand relative to stocks.
Even after the recent rally, broad commodities remain at relatively depressed levels compared with the S&P 500 when you look back over the last 15 to 20 years.
A lot of investors simply do not own them.
That means it may not take a massive allocation shift for additional money flowing into the space to have an impact.
I am not saying commodities are going to repeat what happened in 2008 or 2011.
I am saying the relative trend is interesting, the absolute trend is improving, and the asset class remains under-owned.
That gets my attention.
One Strategy I Am Looking At
The last thing I discussed in the video is managed futures.
One ETF I am currently taking a pretty hard look at is DBMF.
I do not currently own it.
What makes the strategy interesting is that it can take long and short positions across several different asset classes, including stocks, bonds, currencies, and commodities.
That gives it the potential to behave very differently from a traditional stock or bond portfolio.
If interest rates continue rising, commodities continue strengthening, and we continue seeing large trends across currencies and global equity markets, a managed futures strategy may be able to participate in some of those moves.
It also potentially provides something that is difficult to get from a traditional 60/40 portfolio: a return stream that does not necessarily depend on stocks or bonds going up.
Again, I do not own it right now.
It is simply something I am researching because it lines up with several of the trends I am already watching.
What I’m Watching Going Into September
Going into September, I am watching a few things.
I want to see the S&P hold above its recent breakout.
I want to see the Nasdaq hold its support level.
I want to see whether semiconductors can regain some relative strength.
I want to see whether volatility continues confirming the market’s move higher.
And probably most importantly, I want to see what happens with interest rates and commodities.
For now, I remain constructive.
The average stock is still holding up. Value and equal-weight indexes look healthy. Technology continues to lead. Volatility remains subdued.
At the same time, the bond market and commodity markets are telling us that inflation and interest rates may not be finished as a story.
Things can change quickly.
And as always, I reserve the right to change my mind when the prevailing trends change.
Matt Williams, CFP®
JTM Williams Capital Management
The ETFs, indexes, securities, and strategies discussed are for illustrative and educational purposes only and do not constitute a recommendation to buy or sell any security.
