With massive gains post-April lows, the major US equity indices are showing signs of fatigue. This is taking place a couple of weeks before the upcoming FOMC meeting in which markets have locked in a 25-basis-point cut in the fed funds rate.
 

The financial markets have convinced themselves they will get a cut in the fed funds rate in this month’s FOMC (Federal Open Market Committee) meeting, slated for 16-17. In the futures market, fed funds traders are betting with 90 percent certainty that the rates will be lowered by 25 basis points in two weeks’ time.

The fed funds rate currently stands at a range of 425 basis points to 450 basis points. The last time the FOMC cut was last December, when the policy-setting body reduced the rates by 100 basis points over three meetings, including a 50 in September.

After this month’s meeting, traders are pricing in one more cut this year – in December. This is expected to be followed by three more cuts next year, ending 2026 between 300 basis points and 325 basis points (Chart 1).
 

If this dovish scenario comes to pass, the cut in two weeks’ time would have essentially marked the beginning of an easing cycle, although it is too soon to unconditionally model that in.

August’s jobs report is on schedule for this Friday. In July, only 73,000 non-farm jobs were created; worse, May and June were revised lower from 144,000 and 147,000 to 19,000 and 14,000, in that order. If August fares well and revisions for the prior months do not disappoint, it is probable traders will be forced to revisit their dovish rates outlook for 2026. It will be hard to keep ignoring the hard data.

Last Friday, July’s PCE (personal consumption expenditures) index was published, and it was stronger than expected. Headline and core inflation respectively rose 2.60 percent and 2.88 percent from a year ago. The Federal Reserve focuses more on the core. Core PCE, the central bank’s favorite metric for consumer inflation, bottomed at 2.61 percent in April and has risen every month since; the Fed has a two percent goal. Earlier in February of 2022, core PCE peaked at a four-decade high of 5.65 percent (Chart 2). The uptick in core PCE in recent months is not going in the right direction.

The trend in CPI (consumer price index) acts the same. In the 12 months to July, core CPI increased 3.06 percent – a three-month high after April’s 2.78 percent low.
 

In the wake of July’s dismal jobs report, as traders got convinced of a cut this month, followed by several more in the upcoming months/quarters, the Russell 2000 scored an important technical victory. The index broke out of 2300, which going back to February 2021 has attracted both bulls and bears.

Small-caps inherently have a larger exposure to the domestic economy versus their large-cap cousins which also have international exposure.

Most recently, breakout attempts at 2300 were getting resisted from early July. So, when a breakout occurred on the 22^nd last month, it was a signal that lower rates were coming and that the economy would benefit from that. Although the fact remains that the small cap index remains under last November’s all-time high of 2466, which nudged past the prior high of 2459 from November 2021 (Chart 3).

Last week, the Russell 2000 edged up 0.2 percent to 2366, with an intraday high of 2384 on Thursday, yet was unable to meaningfully build on the prior week’s 2300 breakout, finishing with a weekly spinning top. Bulls apparently spent a lot of buying power in reclaiming 2300 and now look vulnerable. The daily is way overbought. A breakout retest at 2300 is the path of least resistance.
 

Things are shaping up similarly on the S&P 500, which hit a fresh intraday high of 6508 last Thursday, with the index up 0.6 percent for the week by then; but by Friday’s close, it was down 0.1 percent to 6460. In the end, a weekly doji was formed. This comes on the heels of a weekly hanging man in the week before that and a bearish engulfing candle three weeks before that (Chart 4).

It is true these candles need confirmation for equity bears to get the upper hand – timing and magnitude notwithstanding – but the fact that these indecision and/or potentially bearish candles are showing up after massive gains should tilt the odds in bears’ favor right here and now. The large cap index bottomed at 4835 on 7 April.

The 50-day moving average lies at 6316, followed by a crucial breakout retest at 6100s, which has not been genuinely tested since June.
 

A similar test on the Nasdaq 100 takes place at 22100s. The tech-heavy index last week shed 0.4 percent to 23415, unable to hang on to Thursday’s intraday high of 23741, which established a lower high versus the all-time high of 23969 set on the 13^th last month. When that record was made, the index ended with a weekly spinning top. Two weeks before that, a bearish engulfing candle formed, although it was not confirmed in the subsequent week (s). Then, last week, a shooting star formed, and it was preceded by a hanging man (Chart 5).

All these candles have appeared after a 45-percent surge post-April 7^th low. The 50-day rests at 23080. Around there lies horizontal support at 22900s. Then comes the all-important 22100s.

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