[Outlook] After an Ugly Start to the Week, the Market Recovers

And Now the Door is Wide Open For … After an Ugly Start to the Week, the Market Recovers And Now the Door is Wide Open For … By Donn Goodman August 11, 2024 Good to have you back readers. It has been a volatile and exciting week in both the markets and at the Olympics. I recall the old ABC Wide World of Sprorts adage, “Spanning the Globe and bringing you the Thrill of Victory and Agony of Defeat”. Kind of sums up the past 10 days in sports and the markets. Depending on the different market segments, the Dow, S&P 500 and NASDAQ are all down from their yearly highs, but well off the pounding they took last Monday. See below: This may not seem like much, but the speed at which these market segments declined, especially the NASDAQ, was swift and shocked most investors including the big hedge funds that got caught heavy on margin. Some technology stocks, like Nvidia and other chip manufacturers, fell by as much as 30% within one to two weeks. The technology ETF XLK was down 7% on Monday. See the below chart: Fear, as measured by the VIX, spiked this past week and priced portfolio insurance (puts) as if we were in a bear market. See chart below: Perhaps the most surprising part of this recent sell-off was the velocity of the rebound that these stocks had. At the end of Friday, the S&P, which was down 3% on Monday, fully recovered and was unchanged for the week. See below: This week offered investors the worst and best days they have seen in quite some time. See chart below: Investor Euphoria I have lived through several extreme bullish and extreme bearish periods. I believe I have witnessed enough different types of markets to realize that when we are in the midst of a “bull market” it seems as if stocks will just keep going up and up (and never stop). Investors get transfixed on waking up every day to see a new high or their favorite stock going up another 1-3%, similar to what we have been witnessing in the semiconductor sector with stocks like Nvdia. Likewise, I have also experienced a few dramatic market sell-offs/crashes (1987) and extended bear markets to know that during these periods investors believe that stocks will never go up again. There are folks who monitor these such moves and try and forecast what might come next? Here is a chart that was published recently showing that “investor euphoria” was at highs not seen since the tech melt up of 1998-1999. I remind you of what happened next from 2000-2002. Recently the Euphoriameter was at the same place it was at in 2000 right before the tech meltdown. See graph below: The effect of this recent volatility and sell-off is that, for now, the Bulls have vanished. As you will see from the chart below, The Investors Intelligence Survey saw the largest two-week drop in Bullish sentiment since the 1987 crash. Bulls dropped from 64.2% to 46.9%. As a bull market matures, investors become overconfident and complacent. Then investors lack conviction and are questioning the new highs that persist, over and over. This is exactly why corrections are healthy and need to take place. They shake out the weak hands and reset sentiment to more sustainable levels. What caused the sell-off? As mentioned above, there was already nervousness in the market and investors were becoming suspect if the markets could continue to climb higher and make new highs. As we also wrote about last week, there has been a rotation going on with shifts from large-cap tech names to more value-oriented stocks that have higher dividend payouts. Money had also been flowing heavily into small-cap stocks that had been in hibernation for some time. If you have not read last week’s Market Outlook, [you can go here to review or reread it now](). There have been other reasons that investors have been using since mid-July to sell down Tech stocks which then expanded out into the rest of the market these past 10 days. These reasons include: - Lofty valuations on many highflyers. The large technology stocks began selling at nosebleed price to earnings ratios and investors realized the “market” was getting expensive. - We are in the middle of earnings season and some of the commentary coming out of companies is for a softening in their projections going forward. - While more than 75% of companies have exceeded their earnings expectations, many of them are not beating their top line revenue projections. - Earnings disappointments have recently picked up speed. (Again, we covered this in last week’s Market Outlook and [you can go here to review this]()). - Interest rates in Japan had trended up for the first time in over 20 years. This began to affect the Japanese Yen to US Dollar ratio. Highly leveraged hedge funds and institutional parties use the Japanese Yen currency as part of their margin programs. Hence, they began unwinding their “margin-carry” trade 10 days ago. This took down some highly liquid and profitable positions these funds held as part of this trade. Names like Nvidia, Broadcom and other stocks (and chip stocks) that have doubled in less than a year were used to raise cash and reduce margins. - A slowdown in the economy. As we illustrated in last week’s column about the ISM and jobs numbers, disappointing numbers in these areas spooked the markets as a soft landing became questionable. This was also reflected in the interest rate markets, as rates on the 10-year plunged to below 4.0% Institutional risk appetite has also been declining. Portfolio managers have been adding risk most of this year, but got a bit too bullish in mid-July, just as they had in July 2023. Both Julys (2023 and 2024) ended up being near term highs for the S&P 500. See chart below: All told, instead of an orderly pullback the market selloff picked up speed and momentum and within a few days saw bigger volume coming in and more selling taking place. Last Monday the markets had a 3% (or more) decline in the NASDAQ and a 1,000-point pullback in the Dow. Other than small-cap stocks (IWM) which went negative on the year this past week, the other markets have respectable gains for the year (S&P 500 up 12%) and many investors were motivated this past week to lock in gains and reduce risk. Are we facing a hard landing now or even a Recession? Click the links below to continue reading about: - Weighing the evidence of a recession - Why we’re optimistic - Indicator with an 85% win rate since 1928 is bullish over the next six months - The Big View bullets - Keith’s weekly market analysis video [Click here to continue to the FREE analysis]()[Click here to continue to the PREMIUM analysis]( Best wishes for your trading, Donn Goodman Every week we review the big picture of the market's technical condition as seen through the lens of our Big View data charts. The bullets provide a quick summary organized by conditions we see as being risk-on, risk-off, or neutral. The video analysis dives deeper. Risk On - [Foreign equities]()actually are now out performing US equities on a short term basis with Emerging Markets (EEM) leading more established markets(EFA) with both closing positive on the week. (+) - [The percentage of stocks above key Moving Averages]( hit oversold levels and are now bouncing which is positive on a short term bias.(+) - [The Dow Jones Industrial Average (DIA)]( closed in a bull phase despite the selloff that started mid July.( +) - [The weekly charts on the four indices]() all closed beneath their ten week averages, but are holding on to their bull phases and their 50 week moving averages on Real Motion (+) - [The 3 month verses 1 month volatility rati](o, an important sentiment reading improved by Fridays close and crossed above the 10-day moving average(+) Click the links below to continue reading about: - Weighing the evidence of a recession - Why we’re optimistic - Indicator with an 85% win rate since 1928 is bullish over the next six months - The Big View bullets - Keith’s weekly market analysis video [Click here to continue to the FREE analysis and video.]()[Click here to continue to the PREMIUM analysis and video](. 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