9-27-26 Weekly Market Prep & Analysis

Last week was about making the market prove itself. This week should give it plenty of opportunities to do exactly that. We have a much heavier economic calendar, with labor data scattered throughout the week, PCE on Wednesday, ISM on Thursday, and the September Employment Report on Friday. More importantly, these reports arrive immediately after the Fed raised rates and while the bond market continues to apply pressure on equities. We no longer need to wonder whether the Fed will hike. Now we get to see whether the economic data gives them a reason to do it again.

The calendar matters more than it normally would because this week gives us information on both sides of the Fed's mandate. We get another look at inflation with PCE on Wednesday and then a much more complete look at employment on Friday. The September Employment Report is expected to show roughly 100,000 jobs added with unemployment around 4.2%, while the previous core PCE reading was still running at 3.3% year over year. That is well above the Fed's 2% target, so neither side of this equation has become particularly easy for them yet.

Before getting into that, we need to go back to last week's plan because price gave us a pretty useful lesson. I said 766.53 was the spot to beat before I would feel comfortable saying $SPY had escaped the limited range we had spent most of September trading inside. Price cleared the area early in the week, eventually traded back underneath it, and then recovered again. By Friday, $SPY had finished at 772.04.

I could not ask for a much better example of why I prefer to let someone else go first. We identified the area that price needed to clear, price cleared it, came back through it, eventually traded underneath it, and then recovered again. Anyone trying to predict every one of those movements beforehand probably spent most of the week changing their opinion. I did not need to. The level gave me a place to observe how aggressive each side became, and price told me when the conditions changed.

This also brings us back to the top down approach I discussed last week. The macro headwinds did not get weaker. If anything, they got stronger. Long-term yields continued pushing higher while the Fed had already raised rates, and Fed officials spent the week making it pretty clear that inflation remains their primary concern. Core PCE is still running above 3%, while several officials have left the door open for additional tightening if inflation does not improve.

This is exactly what I mean when I say that headwinds influence direction without dictating it. There is no question that elevated yields create pressure on equities. We already covered why. Investors can earn a meaningful return in Treasuries without taking equity risk, companies have to borrow at higher rates, and higher discount rates put more pressure on valuations. None of that changed last week. What matters to me is how equities continue responding to it.

That response is important because sellers have had plenty to work with. The Fed already raised rates. The market is considering the possibility of another hike. Long-term yields remain elevated, and the Fed continues talking about inflation as something they have not finished dealing with. If those conditions are enough to force equities into a sustained move lower, sellers have had plenty of opportunities to prove it. Instead, $SPY is still trading in the same general area and finished Friday at 772.

I am not calling that an all-clear for equities. There is another piece underneath the surface that I think is important going into this week. The major indexes have been holding up considerably better than the average stock. Eight of the eleven S&P 500 sectors were still negative for September heading into Friday, while an equal-weighted version of the index was down roughly 4% for the month. At the same time, the traditional S&P 500 remained much closer to its highs because the largest technology and AI-related companies continued carrying an enormous amount of weight.

For anyone newer to this, $SPY does not give every company the same influence. The largest companies receive the largest weights, which means a strong move in a handful of names can keep the index elevated even while a much larger number of stocks struggle underneath it. That does not make the move fake. If the stocks with the largest weights are going higher, $SPY can go higher with them. I simply want to know what is actually leading the move.