There’s a popular weather guy on YouTube named Ryan Hall. His mantra about the weather is “Don’t be scared. Be prepared.”

The financial markets should take heed.

Traders are once again preparing for the response to Federal Reserve Chair Jerome Powell’s speech at the annual Fed confab in Jackson Hole, Wyoming. The fear level is high.

And why not? Last year’s rather short speech by Mr. Powell was so hawkish it triggered a major price correction in the stock market. This year, the market has moved lower ahead of the event.

Maybe the market’s right. Maybe it’s wrong.

Ahead of the event, scheduled for this Friday morning, the market was already in correction mode. I won’t rehash the details about what to expect from Mr. Powell. My boss and good friend, editorial director John Persinos, covered the market’s expectations in his usual thorough manner in his Mind Over Markets column for Tuesday.

Read This Story: What Y’All Can Expect From Jackson Hole

I certainly won’t forecast what may or may not happen when Mr. Powell delivers his comments beyond the obvious: the market will move.

Instead, I will offer an appraisal of where things stand before the speech and how it sets the stage for what may follow.

Bonds. Bonds. Bonds. Did I Mention Bonds?

The term Bondmageddon has been thrown about lately. Regardless of the clickbait nature of the term, it’s a fair description of recent bond market activity, as the U.S. Ten Year Note Yield (TNX) has risen to the point where investors should consider whether we have entered a secular (the long term as measured in years, maybe even decades) bear market in U.S. Treasuries.

Why should stock investors care so much about bonds? Because U.S. Treasury bond yields are the benchmark for mortgage rates and real estate loans, while setting the general climate regarding how easy it is to borrow money to do business.

When bond rates are stable or falling, it is generally a positive for the economy and the stock market.

A decade long review of the TNX shows that yields have not crossed above 4% in recent memory, while simultaneously seeming to be building a head of steam in the last few weeks as inflation fears have been fanned by the Fed’s recent comments.

Another Fed Trial Balloon?

While the consumer price index (CPI) and produce price index (PPI) have cooled, regional Fed surveys offer a mixed economic picture. More recent and highly fluid data show softening in the global economy. Thus, it’s difficult to know how this will sway Powell’s remarks. Here are some factors to consider:

• European PMI data show the eurozone economy continues to contract;
• China’s housing sector woes are worsening;
• Retailers are reporting dismal earnings, except for some discounters. Many are cutting future guidance (see final price chart below);
• Mortgage applications are crashing, existing home sales are falling, new home sales are rising; and
• Ahead of Powell’s speech, Richmond Fed president Barkin noted that the U.S. economy could re-accelerate and he won’t “prejudge” what will happen at the September meeting of the Federal Open Market Committee (FOMC).

The last bullet point is particularly interesting to me. Is this another trial balloon?

The Big Picture for Stocks

Bond traders may be right. Yet, the overriding premise for stock traders to consider is that despite the negativity of the moment, the current price correction is primed for an upside reversal. That’s because the stock market is oversold while pessimism is near its recent highs. Usually, that’s a bullish combination.

Anything seen as remotely positive in Powell’s speech may be enough to jump-start yet another rally in stocks.

You can see the current status of the stock market in the composite chart of the New York Stock Exchange Advance Decline Line (NYAD), above. Here are the salient points:

• NYAD has recently turned up after trading outside the lower Bollinger Band (green lines surrounding prices). This is the market returning to normal price behavior because prices outside the Bollinger Bands indicate that prices have moved too far, too fast, and a return to the mean (the 20-day moving average) is likely;
• The CBOE Volatility Index (VIX) has failed to rise above 20. That’s bullish because even though VIX is off its lows, the amount of bearish activity by traders has not reached a point where big money has been forced to sell stock index futures to protect their accounts; and
• The Relative Strength Index (RSI) is hovering just above 30. Note that the two previous RSI readings near this area were preludes to two big rallies in stocks (October 2022 and March 2023).

The fourth indicator in the grouping, the Secured Overnight Finance Rate (SOFR) measures the overnight interbank rates futures market. It’s an indirect measure of liquidity, which currently is neutral to slightly negative. SOFR tracks the Fed’s rate hikes. When SOFR falls, it’s a positive for stocks.

The Bellwether Sectors

There are two areas of the stock market which bear watching and whose price action is especially worth considering after Powell’s remarks on Friday morning: homebuilders and real estate investment trusts (REITs).

The SPDR S&P Homebuilders ETF (XHB) has tumbled recently as bond yields have risen. But as I’ve said here countless times; there aren’t enough homes available in the market in the face of rising demand as the ongoing population shift away from large cities continues.

The latest existing home sales figures show that current inventories are 50% below the historical average, as homeowners who bought while mortgages were at 3% don’t want to sell and purchase a different home with a 7% mortgage.

Meanwhile, homebuilders are building just enough houses to keep up with the current demand of qualified buyers. Supply is on the side of the homebuilders since they are the only group that can adjust to rising demand quickly enough. That’s why new home sales rose more than expected recently. Ahead of the speech, XHB is showing signs of stabilizing, as bargain hunters nibble at the shares.

The woes of commercial real estate (CRE) have dampened the returns for REITs lately. The price action for the SPDR S&P Real Estate ETF (IYR) attests to this fact. Yet, what IYR doesn’t show is that well-managed REITs which specialize in single family and multi-family rentals are in many cases outperforming the composite REIT market. As with XHB, above, money is trickling back into IYR ahead of Powell’s speech.

An example is the Apartment Investment and Management Company (NYSE: AIV), whose shares are well off their bottoms and forming a long-term price base. I expect that AIV and similar companies will eventually benefit greatly from a bullish reversal in bond yields.

Meanwhile, as the Accumulation/Distribution Indicator (ADI) shows, short sellers are losing their enthusiasm for AIV, even as the On Balance Volume (OBV) indicator suggests that buyers aren’t quite ready to move in to the shares aggressively.

On the other hand, the retail sector is having its troubles. The health of the consumer is being called into question as the resumption of student loan payments and generally higher costs of living begin to weigh on households.

I present the following price chart without comment.

Bottom Line

The bond market may be on the verge of a long-term (secular) bear market. The stock market is oversold in the short term, but is highly vulnerable to the specter of higher interest rates and what happens in the bond market.

Powell has a history of moving the markets with just a few words. Last year’s comments in the same venue in which he will speak on 8/25/23 triggered an aggressive downtrend in stocks.

If Powell’s comments are seen as positive during this speech, even in a small way, I would expect a downside reversal in bond yields, which would be followed by a move up in the stock market.

I would also expect what may be an outsized relief move to the upside in the homebuilders and the REITs, especially those REITs which specialize in housing, both multifamily and single family rentals.

On the other hand, if Powell comes off as bearish, the odds are well above average of a resumption of the downtrend for stocks, combined with what may be a long-term bear market in U.S. Treasury bonds, regardless of how oversold the stock market is ahead of the speech.

Think Macy’s type action…everywhere.

Don’t be scared. Be prepared.

Editor’s Note: If you’re looking for ways to generate steady income, regardless of the risks Dr. Duarte just described, consider the investment methodologies of my colleague Robert Rapier.

Robert Rapier is chief investment strategist of our premium advisory, Utility Forecaster. No one understands dividend-paying stocks better than Robert.

After painstaking research, Robert found a rare type of investment that has raised its payouts by double-digits every year for the past 16 years. If you’re tired of anemic payouts, Robert has the remedy. Click here for details.

Subscribe to the Investing Daily video channel by clicking this icon: