Daily Brief - 3 reasons behind the rally

TLDR: Enjoy the short-term rally, for the bull market may soon be over.

To explain why the market rallied, we must first understand why it fell.

A very credible hypothesis was that the market went into take-profit mode in mid-July. Our gauges of option positioning showed the market 90-95% net long, which suggested it was high time to take some money off the table. The Fed cut was also cause for discomfort.

As the market experienced a ~10% peak-to-trough drawdown, a few factors kicked in: (a) long positions in the up-front option expiries were very quickly cleaned up, (b) value kicked in in the market, a good reminder that these markets have large pockets of cheapness, and (c) all our leading indicators started to signal “buy”, pointing to decent economic conditions.

Most of this information however pertains to the short-term trend in markets. The question we’re debating now is different: is the market rally over?

Quite possibly, yes.

We will debate the reasons in the next daily brief, but we will leave you with a key litmus test: observe whether we’re able to make a new high again in September. If not, the bull market has left us. With CPI coming in weaker, the Fed will most certainly do a rate cut and - as we often told you - that’s the beginning of the end for the cycle.

How to trade it

For allocators, fixed income is the way. Lean into those long treasuries.

For traders, watch for the rally nearing the tops, and keep an eye on Toggle’s Leading Indicators. We might have a sweet short chance ahead of us.

Market Movers: Stocks to long & short

Below are the historically best and worst performing US stocks on a 1-month horizon, following previous rate cuts by the Federal Reserve:

Top 3:

1. NET:NYSE 9.24%
2. ACM:NYSE 7.23%
3. DLTR:NASD 6.80%

Bottom 3:

1. UBER:NYSE -17.28%
2. DDOG:NASD -15.93%
3. ZG:NASD -14.64%

Earnings Spotlight: Walmart reports tomorrow

With consumer brands reporting a slowdown in spending, Walmart could stand to benefit as a reliable defensive pick. Walmart is known for its affordability and essential products, making it a go-to retailer during economic downturns when consumers are looking to cut costs.

As a result, expectations are high, especially following a 29% rise in its stock year-to-date. Analysts predict that Walmart will report revenue of $167.3 billion, earnings per share of $0.65, and U.S. comparable sales growth of 3.3%.

Many believe that Walmart will continue to thrive amid global market uncertainties, while the retail sector is keenly awaiting the company's perspective on the current state of U.S. consumer spending.