The Monday meltdown finally showed some key elements of fear which suggests that this selloff could be nearing conclusion. While the SPX and QQQ’s 3% declines represented the largest moves since 2022, there still hasn’t been an equivalent move in the Equal-weighted indices, which look to be in much better shape. Additionally, USDJPY’s decline, which was thought by many to have been a key catalyst for this giant cross-asset decline, is rapidly approaching last December lows which should provide some stability in the next couple days. Furthermore, Technology as a sector has now sold off to near this year’s lows and as Tom Lee has discussed, valuations look reasonable ahead of a time when FOMC could be set to cut rates as many as five times in the next four months. Overall, I sense that the decline from mid-July is nearing its end and a bounce should begin to get back underway this week, or starting next week into mid-September.
Technically, I don’t feel that it’s right to be bearish, despite the violent selloff over the last couple weeks. The reasons are as follows:
–While Technology has sold off sharply, it’s now nearing former lows from 2024 while the broader market has shown minimal true evidence of deterioration.
-USDJPY now seems to be nearing strong support and could stabilize near 140 and bounce.
-Finally, some evidence of volume dispersion was witnessed as more than 90% of volume fell into Declining stocks and produced just our second “90% Down Day” of 2024.
-Elliott-wave structure still shows the move from mid-July as being part of an ABC corrective structure, and any decline under 5119 into Tuesday should bring about a low at levels above the prior bottom from mid-April 2024.
-Sentiment polls such as “Fear and Greed” have now moved into “Extreme Fear” territory while the VIX pushed above 60 briefly on Monday with the VIX curve showing sharp backwardation.
-Last week brought about a move back to new all-time highs for SPDR Select Healthcare ETF (XLV -0.03% ) while Invesco’s Equal-weighted Financials, and Industrials ETF’s (RYF, and RGI, respectively) both moved to new highs one week prior. Thus, despite the “Tech Wreck” a number of sectors had been acting quite well prior to Monday’s drop.
-Weekly charts of MSFT, AAPL, AMZN, META, NVDA, and GOOGL have not shown much intermediate-term technical deterioration.
-Cycle Composite of SPX shows this selloff to be likely completed by 8/19 at the latest ahead of a sharp rally back to highs into mid-September.
-Seasonality shows strong August performance in Election years, and normally in 2H following a strong first half. Our current August performance shows -6% returns over the first three days of August. I expect the back half of August to prove much more positive.
Bottom line, the combination of a rapid acceleration lower in Bond yields and US Dollar served to spook the market in the short run, and Technology has given up a lot of ground very quickly. However, markets are now pricing in a 50 basis point (b.p.) cut in September and potentially five cuts into year-end. While this sounds extreme in an Election year, it makes SPX seem quite appealing following a time when both momentum and valuations have pulled back sharply over the last month.
As this hourly SPX chart shows below, SPX managed to bottom Monday near 5119, a level which equates to a 1.618 x Fibonacci alternative projection of the initial 7/16-7/25 decline when measured from 8/1 peaks.
As can be seen by this chart, SPX attempted to rally but failed near 5248, a level which approximates the 23.6% Fibonacci retracement. A further rally should encounter possible resistance near 5329, or 5394, both which line up near “Open gaps” on this hourly chart.
In the short run (meaning into Tuesday and possibly Wednesday of this week) one cannot rule out a test and break of 5119, which would help to create a final low, technically. However, it’s not worth making too big of a deal of a 1-2 day decline and most indicators from a price and time standpoint seem to indicate that lows could be near, and might happen this week.
Once SPX either declines under 5119, or gets back over 5394, we can start to discuss upside targets. At present, this selloff looks to be late in the game, but it’s difficult to not acknowledge a possible retest of Monday’s lows which could bring SPX closer to a meaningful bottom.
S&P 500 Index
Markets seem to now be pricing in a large number of rate cuts
Monday’s volatility caused Fed Funds futures swaps to begin pricing in more than 50 b.p. of cuts for next month, along with 125 b.p. of cuts by end of year.
While Fed chair Powell was dismissive of the possibility of 50-b.p. cut last week, some pickup in cross-asset volatility could be important in forcing the Fed’s hand.
Bottom line, in 2024, the Fed has rarely wished to go against what the market is pricing in. At present, SPX is nearing daily oversold levels in momentum, and looks increasingly quite attractive given the prospects of multiple cuts approaching.
Implied Overnight Rate & Number of Hikes/Cuts Priced In
US Dollar breakdown firmly puts intermediate-term DXY bear market on track
Most eyes remain focused on the Japanese Yen after USDJPY began to weaken sharply on BOJ’s policy.
Yen strength is now nearing last December’s peaks, or as seen below, Dollar/Yen is nearing December 2023 lows.
Overall, given that this recent Carry trade “Unwind” was cited specifically as a reason for why the stock market selloff happened across the globe, it’s now important to watch carefully for evidence of when Dollar/Yen might bottom.
According to Daily USDJPY charts, this looks to be right around the corner as USDJPY nears former December 2023 lows.
US Dollar / Japanese Yen
Technology likely to bottom into Support by mid-August
To follow-up on last Friday’s comments about Technology, both XLK and RYT (Equal-weighted Technology) are growing very close to support, along with the Philadelphia Semiconductor index (SOX).
Technically, stocks like GOOGL, AMZN, AAPL, MSFT, META and NVDA all look to be at/near very good technical support.
While it might take time for Technology to reach all-time highs after this selloff, the price decline has neared important support and technically makes this sector an attractive risk/reward.
My expectation is for Technology to bottom between now and August expiration and it very well could happen this week.
Invesco S&P 500 Equal Weight Technology
