Weekly Market Review, W/C 7th September 2026: Constructive But Cautious
Rating: Constructive But Cautious | Bias: Bullish Lean, Watching for Cracks Beneath the Surface
The Big Picture
The picture this week leans bullish, but there are enough underlying signals worth sitting with rather than ignoring. Liquidity is quietly declining, positioning across major equity indices looks increasingly one sided, and a strong jobs report may carry more nuance than the headline number suggests. None of this changes the near term bullish lean. It does mean the approach stays measured rather than aggressive.
Liquidity. The Cushion Is Gone
M2 is still expanding, which on its own sounds supportive. Beneath that headline figure though, bank reserves are starting to decline and the Reverse Repo facility, is now sitting near depletion. This matters because it used to act as a buffer. When the Treasury needed to rebuild its own cash balance, or when the Fed was gradually shrinking its balance sheet, the RRP used to soak up the difference, keeping actual usable liquidity in the system fairly steady. Liquidity swings are more directly exposed than they have been in years. That is the reason liquidity is showing as flat to negative in the broader composite this week, even with M2 still technically growing.
Bank Lending. Still Growing, Slightly Slower
Bank lending is still expanding, up 7.1% against a previous reading of 7.4%. Growth, not contraction, which keeps the credit backdrop constructive. The pace has eased slightly though, and combined with the liquidity picture above, it is another small signal worth tracking rather than dismissing outright.
Positioning. Asset Managers Leaning Heavily One Way
Asset managers remain mainly long across the S&P 500, Nasdaq and Russell 2000, and short volatility. That is a consistent, one directional stance across equities and the VIX simultaneously. When positioning becomes this uniform, it does not necessarily mean a reversal is close. It does mean there is less room for anything to go wrong before that positioning starts to unwind, and unwinds in a crowded trade tend to move quickly once they start.
Jobs and Earnings. Strong Headline, Thinner Underneath
August payrolls rose 162,000, a genuinely strong number and the best print in five months. Average hourly earnings also rose 3.1% year on year and 0.3% month on month. Read at face value, that raises a fair question: could strong jobs and firming wage growth actually build the case for a rate hike rather than a cut, given how inflationary that combination can look.
Worth being precise about the composition though. Private sector payrolls added only 127,000 of that headline figure, with food services and local government education accounting for a large share of the gain. The three month average is running at just 71,000 and the trailing twelve month average sits at 31,000. One strong month does not undo a trend built on eleven weaker ones. The headline print is genuinely strong. The underlying trend it sits on top of is still soft. Both things are true at once, and it is the second point that tends to get lost in the initial market reaction.
VIX Near 2026 Lows
Volatility remains near its lows for the year. Consistent with the risk on tone and the heavy long positioning noted above, but also consistent with a market that has become comfortable, perhaps too comfortable, with the idea that nothing is going to disturb the current calm.
The Composite Read
This week's composite review indicates a potential shift to a negative view of the markets, with low conviction. Liquidity is negative given the RRP depletion story above. Credit is neutral, holding flat rather than improving or deteriorating. The dollar continues to lose ground against a range of currencies, which is technically a positive contributor. JPY is showing strength too, though this needs a caveat, since much of that yen strength looks driven by intervention rather than genuine, organic market demand. Credit spreads and the OFR stress reading are both sitting flat rather than signalling anything new in either direction.
Put together, the read is one of caution rather than alarm. Defend existing positions and stay selective on new ones.
What This Means Going Forward
Based on everything above, the more likely path from here is continued bullish sentiment in the near term. The instruction to self is to stay engaged with that trend while watching closely for the cracks sitting underneath it. Three specific things are on the watchlist:
Nasdaq, given how far positioning has leaned into it and how sensitive it would be to any liquidity wobble.
The dollar and rate hike question, given the jobs and earnings data above genuinely does leave room for a hawkish read heading into the next Fed decision.
Gold, in relation to the potential dollar weakness could lead to further price increases.
JPY strength, and specifically whether it can sustain itself once the intervention effect fades, or whether it reverses back once that support is removed.
Live Positions
S&P 500. Long, Holding Position remains open. The broader liquidity and credit backdrop still supports holding, though the crowded positioning noted above means this is being watched rather than added to at current levels. Initial expectation was for price to extend up to 8,400 level. However, with the wide correction between wave 1 and 2 and the current correction price is in now we may be in an ending diagonal with a potential target of 8,000 instead. The price action isn't characteristic of what one would expect in a 3rd wave which would be more decisive and aggressive. As the fundamentals suggests, we may see an uplift in price but won't be surprised if the upside is capped.
USDMXN. Short, Holding Position remains open. Continued dollar weakness against a range of currencies supports the thesis. There are technical warnings such as RSI divergence which indicates weakness in momentum. However the trend is still bearish and will wait until price action starts to break to the upside to consider closing the trade. No change.
What to Watch
CPI data release later this week. This could potentially provide a better view on the likely stance the Fed will take on interest rates
RRP levels and repo rate volatility. With the spare liquidity cushion gone, this is the early warning indicator to watch most closely
Nasdaq positioning. Heavily crowded long exposure into a market already showing liquidity caution
Jobs and earnings data ahead of the next Fed decision. The composition beneath August's headline print matters more than the print itself
JPY sustainability. Whether strength holds once any intervention effect fades
Bank lending growth. Still expanding but decelerating, worth tracking for further slowing
These are my views based on my own analysis at the time of writing. Nothing here is financial advice. Always do your own research and manage your risk.
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