August Volatility Repeat
August Volatility Repeat
September starts with a bang
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Hope everyone had a restful Labor Day. We published a detailed post on Sunday explaining each sector we’re bullish on and reasons why. An excellent way to outperform the market is to focus only on the best sectors. While we continue to like Tech, the market is broadening out so there’s a lot more that could rise.
September starts with a bang
The month starts with a -2% day on SPX (-3% on QQQ and IWM). We continue to be in a precarious state with Sept seasonality, pre-election jitters, and options skew flashing warning signs. Yesterday was effectively a repeat of the August VIX-plosion…
After the first VIX-plosion in early August, the VIX compressed at one of the fastest rates ever seen. At that time we noted flows into volatility funds indicating that investors re-entered the short vol trade. Well, yesterday we saw a sharp spike in VIX and index dispersion that likely unwound that same short vol trade again (or a smaller version of it).
Thematically, cyclicals and Mag 7 stocks were down heavily on the day, particularly NVDA and SMH. Defensive stocks like Consumer Staples were bought. As far as we can tell, there was no particular driver of the selloff that started before market open. Aside from perhaps a revival of the Japanese Yen carry trade unwind and weak Chinese manufacturing data, but these are unconvincing.
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Where to from here?
Tuesday was a 73% downside thrust. That means 73% of volume traded on the NYSE were sells. That’s not a super high number and not really indicative of concerted selling in the market.
In addition, the fuel that contributed to last month’s selloff has been burnt off, so SPX is less likely to retest the August lows. Especially without earnings weakening or interest rates rising. The bullish breadth thrusts between Aug 8-19 (discussed here) are still intact and portend new highs.
We expect some more chop in September, but ultimately this should be a shallow dip. As unlikely as it is, we would sell 30% of the portfolio to cash if SPX breaks below the 100d moving average (roughly $5400).
Key charts this week
Shared by @MikeZaccardi on X, this chart shows consumer sentiment measures that haven’t been this high since 2020. Consumer sentiment is great insight on the financial wellbeing of each person in the economy!
There’s a lot of concern out there about rising credit card debt. Mind the Tape (excellent macro writer; check out their work!) had this great chart below that adjusts credit card levels for inflation. It’s risen lately, but not any higher than pre-Covid levels. As we’ve been saying, credit is normalizing but not deteriorating.
This chart from Willie Delwiche on X shows that 47% of global equity indices made new highs in August. That’s the most since 2021! Breadth broadening is usually not a signal of weakness. Global equity markets could have a ways to go.
That’s it for today!
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Disclaimer: This publication is for educational purposes only. The authors are not investment advisors and nothing here is investment advice. Always do your own due diligence.
Thanks for the shout out!