Stocks surged to close out the final week of August, driven by a massive $6.5 billion buy imbalance that dominated the market in a volatile trading session. The unusual activity, which occurred ahead of the long weekend, likely played a significant role in the market’s bullish momentum.
As we have previously discussed, the market-on-close buy imbalance typically starts to build around 2 PM ET, with the final size revealed at 3:50 PM ET. Last Friday, we witnessed a sharp uptick in buying activity precisely at 2 PM, indicating a surge in demand for stocks.
However, it is important to note that gains from the late afternoon rally could potentially be erased as we head into the new week.
The end-of-day rally was likely driven more by month-end rebalancing rather than a genuine buying interest in securities.
From a cyclical standpoint, the market is approaching a critical peak that has historically signaled market tops and bottoms based on its oscillations. This suggests that we may see a downward trend in the market this week, as indicated by the hourly chart.
Volatility Expected to Spike Ahead of Crucial Jobs Report
Investors should brace themselves for increased volatility this week, especially leading up to the release of the pivotal jobs report on Friday.
The VIX and VIX 1-Day indices are likely to experience a sharp rise in the days leading to the report. The market’s anticipation of the report’s outcome will heavily influence trading activity during this period.
The data from this week’s report will play a significant role in the Federal Reserve’s decision on whether to cut rates by 25 or 50 basis points at the upcoming September meeting. A VIX reading in the 20 range by Thursday could indicate a positive market reaction on Friday, barring any catastrophic data.
However, if the jobs report disappoints or the VIX remains elevated, we may see a repeat of the market turmoil experienced after the August 2nd report.
Even after the jobs report is released, liquidity conditions are expected to be challenging in September due to various financial factors. The September 15 tax deadline and quarter-end repo activity may further impact market stability.
Recent declines in SOFR volume and reserve balances, along with stagnant margin balance growth, are likely to have a direct effect on the S&P 500 over time.
Given these factors, it is reasonable to expect potential outflows from the market this month, similar to previous instances such as in April.
USD/CAD Consolidation Ahead of BoC Meeting
Aside from the U.S. economic data, investors should pay attention to the upcoming Bank of Canada Monetary Policy meeting. Market expectations point towards a possible rate cut, with some speculation for a second cut. The USD/CAD pair has shown significant movement recently, with technical indicators suggesting oversold conditions against the Canadian dollar.
Despite previous expectations for a rebound in the USD/CAD pair, the currency seems to be consolidating its position. The inverse relationship between the USD/CAD and the S&P 500 could present an opportunity for the dollar to strengthen in the coming days.
It is important to remember that currency movements are relative, and a weaker outlook in Canada could potentially boost the U.S. dollar, even in the face of disappointing U.S. economic data.
Nvidia Faces Resistance Levels
Monitoring the performance of NVIDIA (NASDAQ:) could provide insights into the market’s future direction. The stock recently tested support at $118.25 and consolidated around that level on Friday.
A potential break below $118 could lead to a further decline towards $110. Additionally, the $120 level will act as a resistance point at the beginning of the week, potentially capping any upward movement in the stock. If NVIDIA surpasses $120, the next significant resistance level would be around $125.