Mid-week market update: When I wrote on the weekend that the stock market was undergoing a prelude to a correction, I never dreamed that the S&P 500 would skid -2.1% on the first trading day in September to test its 50 dma.
What happened?
Unsatisfactory answers
None of the conventional explanations appear satisfactory. You could blame it on weak ISM Manufacturing report, but it’s difficult to reconcile how a weak ISM print could spark a -2% downdraft.
You could blame it on excessive bullishness on NVIDIA, along with the news that the U.S. Justice Department sent subpoenas to the company alleging it is making it difficult for customers to switch to other vendors. Indeed, the Semiconductor Index has pulled back to test a key relative support zone.
A quick and powerful downdraft like the one yesterday is more likely to be attributable to positioning. A group of traders were probably caught offside and everyone had to suddenly rush for the exit. Here’s Nomura’s Charlie McElligott derivatives analyst:
And similar to the end July NFP / U-Rate “Fed Policy Error” scare which lead to the “Hard Landing” Tail being repriced sharply hire helping to then set-off a chain of events in the Vol space, this latest (and admittedly much smaller) U.S. Economic “Landing Path” uncertainty around “any” U.S. Growth data (like today’s B- and C- list releases) then too coincided with some spicy Hedging –flows in the VIX Options space from this past Friday which seemingly helped to get things rolling downhill.
If that is indeed the most likely explanation, then today’s lack of bearish follow-through of -1% or more is good news as it is a signal that the market is stabilizing.
Ryan Detrick pointed out that while September usually experiences negative seasonality, the weakness usually shows up in the second half of the month.
Waiting for NFP
Looking ahead, the August Payroll Report due to be released Friday morning will be a source of potential market volatility. The July JOLTS report today showed a worsening trend of quits to layoffs (red line), which tend to lead employment (black line). If we get a weak jobs report Friday, will bad news be bad news (for stocks)?
Commodities show where the global economy is at right now. They are crashing. These other American statistics are suggestions. Commodity demand in China is falling. China is sick and Europe is catching their cold.
We are seeing a tussle between dumb money and smart money (a term credited to be coined by Ned Davis Research, or so it is believed). Since a historic rate rise cycle since early 2022, smart money seems to have been dumb money. None of the historic constructs have come out to be true. None.
Ken introduced this group to an advisory from Montana, who still believe we are heading to a hard landing of historic magnitude.
Market does, what it does, to make majority of investors look dumb. This part seems to have come out to be true yet again, and that I believe is the smart thing to follow!
Smart money, dumb money, aside, to his credit Cam nailed it, by calling a market bottom around 3600, and a major buying thrust around 4200. These points on the S&P 500 are now long gone history FWIW.
US market may be showing a paradigm shift? Time will tell.
I remember those calls by Cam distinctly. Kudos to him ( smart money call) but fear kept me from adding till the second call (dumb money).
Fast forward, I have more closely hewn to his big calls.