A "local" peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.

Tom Lee, CFA
A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.
A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.
A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.

VIDEO: We think the VIX made a local top, setting stage for stocks to rally post-Aug jobs report on Friday.

Please click below to view our Macro Minute (duration: 4:43)

A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.

Even if caution is warranted next 8 weeks into election day, there is no fundamental reason for stocks to trade so poorly the first 3 trading days of September. It is for this reason that we believe stocks could be making a “local bottom” on the August jobs report (Friday) and potentially rally into the mid-Sept Fed FOMC rate decision.

  • To reiterate, I do not see any reason why stocks fell so sharply in the first 3 days of this year, pushing all major indices down -3%. That is even considering the JPY (yen) has strengthened recently (removing global liquidity). And even the VIX surged from 15 to 23 in 36 hours, signaling near-term panic.
  • We sent out an intraday Word yesterday listing the four reasons we think the August jobs report might be the positive catalyst. And the primary reason is we expect this report to allay concerns the US is heading for a hard landing (recession).
  • The key is for the jobs figure to be better than July’s 110k. And this could be more jobs than 110k or it could be the unemployment rate improving from 4.3% currently. And the caveat being we also don’t want an overly strong jobs report (>200k) because this might make some concerned the Fed backpeddles on rate cuts.
  • Both ISMs are not terrible on jobs. The Aug ISM manufacturing at 46 is an improvement from July. So incrementally less bad. The Aug ISM services stood at 50.2, still above 50 (equates to expansion). Thus, the surveys don’t paint an entirely negative picture.
  • But to us, the set up for a rally stems from the strange things about the VIX. And there are two things that stand out:
    – first, VIX term structure (1M less 4M) is dis-inverting, a sign of stock low
    – second, Spot VIX is now higher than 2M VIX (election day), which is unusual
  • We wrote extensively about the VIX term structure and the un-inversion as being a positive signal. In the most recent episode, the VIX term structure inverted on Tuesday and as of Thursday is uninverting. And possibly flips back to normal contango after Friday. In the past, these have marked tradeable lows for equities.
  • There is something even more curious. It is the levels of VIX futures:
    – Spot VIX 20
    – Sept VIX 18.7
    – Nov VIX 19.7
  • Why is the Spot VIX above the Nov VIX? The fact that Nov VIX is above Sept makes sense, as the market sees uncertainty around the election. But I am puzzled about the Spot VIX. To me, this near term surge of the spot could be the Yen move, or it could be markets so fearful of the next 8 weeks, investors are suddenly seeking protection.
  • In any case, this is a further reason to expect stocks to find a tradeable low near term.
  • Looking beyond Friday, there are 3 key fundamental catalysts this month:
    – 9/6 Fri: August jobs report
    – 9/11 Wed: August Core CPI
    – 9/18 Wed: Sept FOMC rate decision
  • On jobs, the positive or negative interpretations are as follows:
    – negative: strong (consensus +165k) risks Fed backpedaling on cuts
    – positive: decent (>110k and <165k) means “soft landing”
  • On Core CPI, the positive or negative interpretations are as follows:
    – negative: Core MoM >+0.20% = “hot”
    – positive: Inflation falling like a rock <– our view
  • On FOMC, the positive or negative interpretations are as follows:
    – “hawk” Fed: cuts -25bp but doesn’t confirm more, negative
    – “panic” Fed: cuts -50bp, negative for stocks
    – “easing to neutral” Fed: cuts -25bp and says more to come, positive
  • To me, this means the fundamental catalysts are “front loaded.” And at this moment, we believe this means the weakness in stocks in September is front loaded. But that is just based on a fundamental view.

BOTTOM LINE: Small-caps lead, Fed is dovish

Keep in mind the Fed is dovish and there is a focus on keeping labor markets strong. We could be seeing turbulence for the next 8 weeks, but this is also in the context of a very strong stock market in 2024. One where the S&P 500 has gained in 7 of the last 8 months.

And with inflation softening, the mandate focuses on strong jobs. That acts as an implicit “put” on the equity market, as falling asset prices would threaten to weaken labor markets.

Given the dovish Fed, this remains our 2024 playbook:

But as we noted multiple times, we stick with the top 2 (small-caps and financials and industrials)

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A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.

A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.

A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.

A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.

A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.

A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.

A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.

A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.

A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.

A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.

Key incoming data September:

  • 9/3 9:45 AM ET: Aug F S&P Global Manufacturing PMI Tame
  • 9/3 10:00 AM ET: Aug ISM Manufacturing PMI Tame
  • 9/4 8:30 AM ET: Jul Trade Balance Tame
  • 9/4 10:00 AM ET: Jul JOLTS Job Openings Tame
  • 9/4 10:00 AM ET: Jul F Durable Goods Orders Tame
  • 9/4 2:00 PM ET:  Fed Releases Beige Book Tame
  • 9/5 8:30 AM ET: 2Q F Non-Farm Productivity Tame
  • 9/5 8:30 AM ET: 2Q F Unit Labor Costs Tame
  • 9/5 9:45 AM ET: Aug F S&P Global Services PMI Tame
  • 9/5 10:00 AM ET: Aug ISM Services PMI Tame
  • 9/6 8:30 AM ET: Aug Non-Farm Payrolls
  • 9/9 9:00 AM ET: Aug F Manheim Used vehicle index
  • 9/9 11:00 AM ET: Aug NY Fed 1yr Inf Exp
  • 9/10 6:00 AM ET: Aug Small Business Optimism Survey
  • 9/11 8:30 AM ET: Aug CPI
  • 9/12 8:30 AM ET: Aug PPI
  • 9/13 10:00 AM ET: Sep P U. Mich. Sentiment and Inflation Expectation
  • 9/16 8:30 AM ET: Sep Empire Manufacturing Survey
  • 9/17 8:30 AM ET: Aug Retail Sales Data
  • 9/17 9:00 AM ET: Sep M Manheim Used vehicle index
  • 9/17 10:00 AM ET: Sep NAHB Housing Market Index
  • 9/18 2:00 PM ET: Sep FOMC Decision
  • 9/18 4:00 PM ET: Jul Net TIC Flows
  • 9/19 8:30 AM ET: Sep Philly Fed Business Outlook
  • 9/19 10:00 AM ET: Aug Existing Home Sales
  • 9/23 8:30 AM ET: Aug Chicago Fed Nat Activity Index
  • 9/23 9:45 AM ET: Sep P S&P Global Manufacturing PMI
  • 9/23 9:45 AM ET: Sep P S&P Global Services PMI
  • 9/24 9:00 AM ET: Jul S&P CoreLogic CS home price
  • 9/24 10:00 AM ET: Sep Conference Board Consumer Confidence
  • 9/25 10:00 AM ET: Aug New Home Sales
  • 9/26 8:30 AM ET: 2Q T 2024 GDP
  • 9/26 10:00 AM ET: Aug P Durable Goods Orders
  • 9/27 8:30 AM ET: Aug PCE Deflator
  • 9/27 10:00 AM ET: Sep F U. Mich. Sentiment and Inflation Expectation
  • 9/30 10:30 AM ET: Sep Dallas Fed Manuf. Activity Survey

Economic Data Performance Tracker 2024:

A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.

Economic Data Performance Tracker 2023:

A local peak in VIX likely at hand = near-term rally likely post-Aug jobs. Even if one is cautious into election day, no reason for stocks to fall first week of Sept.
Source: Fundstrat, Bloomberg

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Tom Lee, CFA
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