Volatility Subsiding - Risks Still High
Market Context - Guest Post
Dear Stock Market Cycle Readers,
As our cycle analysis needs to be seen in the context of market conditions, I will periodically invite guest writers to share their market views. This could help us better interpret our cycles in the appropriate market context. This is one of the first such contributions, and I am pleased to have
share his market perspective with us.Regards,
Lars
Welcome to MktContext! I am a professional money manager, trader, and investor who loves writing about markets. We make it easy to understand the economy and time the stock market (yes, it’s possible!).
Week in review
The markets have calmed down from last week. But bottoms are messy and we may not be out of the woods yet. We're still seeing big risks out there.
As we discussed in our Sunday letter, the VIX (the market’s “fear gauge”) has been subsiding. The VVIX (volatility of VIX) has also behaved well, indicating a return to stable market conditions.
The SPX and QQQ have been recovering and are buyable now. We made the recommendation on Sunday to buy if it met our criteria. That said, it’s still murky so buyer beware. The worst of the VIX-plosion is likely over, but that doesn't preclude the possibility of a retest of August lows.
Last week’s unemployment claims came below expectations, negating the impact of the disappointing jobs report that sparked this whole selloff. Importantly, this rise in unemployment rate isn’t driven by falling labor demand (layoffs) but rather an increase in labor supply (immigration and labor force participation). That means it shouldn’t trigger job losses and a drop in incomes; good news for the economy.
Given the shift in risks, banks and economists are raising their estimated odds of a 2024 recession. However, we remain steadfast in our view that the economy remains resilient. In fact, we wrote a piece about how smart economists have been wrong all year.
Producer Inflation came out below expectations at 0.1%. Inflation expectations are back to pre-pandemic levels. We have been anticipating this “immaculate disinflation”, as we’ve long maintained that the components of inflation are on their way down. The market rallied on the news, but frankly we think people are more concerned about recession than inflation.
Risks still remain
The market is now pricing in 4 or 5 rate cuts by the end of the year. This is a mistake. Several Fed members spoke recently and pushed back against fast cuts. A hawkish surprise could cause some scares jitters at Powell’s August 23 Jackson Hole speech and the September FOMC meeting. Risks are still high.
Additionally, there are concerns about escalation in the Middle East, with Iran anticipated to attack Israel. While oil prices spiked on the news, geopolitical premiums haven't lasted long lately. Bigger picture, there seems to be an overall malaise in the oil market, tied to weak global demand. We’d be buyers on any inflation scares.
Commentary from CEOs continues to be strong, indicating a healthy consumer, besides some weakness in travel. This should support stocks higher:
We also worry about election jitters, with an even race between Trump and Harris. Typically, the market throws tantrums two months prior to the election date (September) and two weeks prior as well. Be cautious, as we could be in a long sideways range until we get through October.
Lastly, we're still in the seasonally tough August-October period. Stock market bottoms are a long process, and we could retest last Monday's low before we go higher. However, we’re pretty confident that the market will be higher by year-end.
This chart from Fundstrat shows the most common month for a bottom is in August, especially in election years:
What we shared this week
Corporate earnings are coming in strong. It’s important to follow earnings as that tells you the underlying health of the stock market. Give it a read — we discuss beats, revisions, small vs large cap earnings, and more. Be sure to like and follow us while you’re there!
Here’s a chart on rising protectionism. Global trade barriers have TRIPLED since 2019. This spells trouble for multi-national companies counting on overseas revenues. And you know what US sector generates the most revenues overseas? Technology. This trend is NOT friendly for stock prices.
We shared this and it bears repeating. Market makers are in negative gamma mode which means they buy when the market rallies and sell when the market sells off. This amplifies market volatility to the upside and downside. You can get sudden crushes within the span of 5 minutes. It can be nerve-wracking to trade in high-vol regimes, and you need to adjust your trading strategy to accommodate.
That’s all for today!
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has been timing the stock market (and beating it) since 2014.Disclaimer: This publication is for educational purposes only. The authors are not investment advisors and nothing here is investment advice. Always do your own due diligence.
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