August 15, 2024
Good morning,
The evidence continues to grow, suggesting that the past month’s unusually volatile moves in all markets started as an ordinary equity market pullback with a 48-hour global financial system shock thrown on top (carry trade unwind). The normalization of trading conditions has continued so far this week, with the VIX closing all the way down to 16.2 yesterday. That’s the lowest level since July 23rd and a far cry from the panic rise in the volatility indicator at the start of last week. The two events together would portend a gloomy market message. Given that the unwind trade was centralized in the rates and currency markets, there is an argument to separate the events and put less emphasis on the historic spike in the fear indicator (the VIX index) and its accompanying warning signal for equity markets.
That said, we’re left with a July/Aug equity market pullback on the order of ~8% from the 7/16 peak, and through last night, the SPX has now retraced (rallied) almost exactly 61.8% of its pullback (that’s a Fibonacci number which always sparks my interest but doesn’t affect forecasts). The open question now is, was the correction the beginning of the topping process ahead of economic decline (soft or hard) 6-8 months from now? There is no way to know that with certainty today. The near-term technicals still, even after the correction, lean positive, suggesting a bullish tape in the weeks ahead. On the other hand, our best long-term forecasting tool (imho), BCA Research, believes a recession in early 2025 is now tracking and unavoidable.
Moments ago, as I type this note, Futures extended gains (+1%) after retail sales rose at a surprisingly fast pace and initial jobless claims fell, easing recession fears by underscoring the economy’s continued strength. So, there you go, more good tape action for equities that will probably lead to a test of July highs in the weeks to come. That will run us right into the September Fed meeting and whether the Fed will disappoint markets by cutting rates less than market participants are demanding.
Be well,
Mike
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