3 Reasons The Summer Stock Market Rally Has Stalled

The SPDR S&P 500 ETF Trust (NYSE: SPY) snapped its winning streak last week and kicked off Monday with another day of steep losses.

DataTrek Research co-founder Nicholas Colas discussed three reasons why the summer stock market rally has run out of steam despite four consecutive weeks of gains.

1. Investors should monitor yields on 10-year U.S. Treasuries with the next Federal Reserve meeting looming in September, Colas said. Ten-year Treasury yields started the month of August at 2.60%, but they finished last week at 2.98% and were trading at 2.99% on Monday morning. In addition, Colas pointed out that the Fed's monthly balance sheet reductions will double from $30 billion to $60 billion in September, potentially applying further pressure to stock prices.
2. The dollar has been gaining ground rapidly over the past 10 days. The euro is nearly back on par with the dollar. The Invesco DB US Dollar Index Bullish Fund (NYSE: UUP) was up 0.5% on Monday and is now up 1.9% overall in the past five trading sessions.
3. Oil prices have been moderating, but natural gas prices continued to rise to new 2022 highs of $9.34 on Friday. That trend continued on Monday, with the United States Oil ETF (NYSE: USO) down 2.8% and the United States Natural Gas Fund, LP (NYSE: UNG) up 4.2% in early trading. Colas said higher natural gas prices are inflationary across a number of different industries.

See Also: Why Investors Shouldn't Be So Happy About 8.5% CPI Inflation; They're Ignoring 'The Elephant In The Room'

Given these three troubling trends and uncertainty surrounding the upcoming Jackson Hole Summit later this week, investors should expect the VIX volatility index and Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN (BATS: VXX) to remain elevated for now, Colas explained.

"We continue to believe the VIX should, and will, trade in a band from 20-28 and we would use the upper end of that range as a place to add equity exposure," Colas said.

See Also: S&P 500 Snaps 4-Week Winning Streak As Investors Anticipate Higher Interest Rates

Benzinga's Take: The S&P 500 went on quite a run in late July after the latest batch of economic data indicated inflation may have finally peaked. However, just because inflation may have peaked doesn't mean the Fed is going to stop aggressively tightening to get it back closer to its 2% target, a message investors will likely hear loud and clear from Fed Chair Jerome Powell during his speech at Jackson Hole