August 7, 2024

What I said at the Monday morning meeting turned out to be absolutely on the mark as the VIX reached the completely unsustainable level of 66 in the early morning after the collapse of the Japanese market for the worst ever decline in its history and the panicky selling in Europe.

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But for those who had the temerity to buy something like I said to, it has paid off in most cases as the market yesterday put in a very strong showing until 3pm when it came down sharply from its best levels into the close, for whatever reasons.

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As an example, the Dow, which reached a large 746 point gain at that time, gave back a good part of that and ended more modestly higher at 294 up to 38,997 as financials led the way with AXP, GS, JPM doing nicely along with CAT on earnings and MSFT, which finally woke up after a very weak showing recently.

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The same pattern enveloped the S&P, which got to a really strong gain of 126 points by 3pm and also gave back more than half of it into the close to end 53 points up to 5240 as the long-suffering technology stocks showed some life (except for AAPL) as did the financials and industrials. The index had declined more than 6% from its all-time high last month.

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And let us remember that the market had just come off of its worst three day stretch since 2022, and was saved by the old “Turnaround Tuesday” syndrome which means after a bad showing on Thursday and Friday, and an even worse one on Monday, the bullish forces are finally able to take a stand the next day, which is what happened yesterday.

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The Nasdaq also fell victim late as a strong 420 point advance turned into a 167 close up to 16,366 also led by most of the larger beaten-down technology issues. The Russell came along for the upside ride and ended 25 points up to 2064 while the VIX got down to 27.71 on the old “bag job” effort by market makers to force anyone who wanted to liquidate bullish positions to pay through the nose to get out. And once again, I remind people that if you look at a long-term chart of the VIX, whenever it gets to that high of a level, it invariably comes down fast, which is what happened from that early time on Monday morning to how it ended yesterday and which it is now around 23.

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A rising tide did cause stocks to go higher, and calm returned after Japan’s market soared earlier Tuesday to claw back much of the losses from its worst day since 1987. The concern here had been that the Federal Reserve had pressed the brakes too hard for too long on the U.S. economy through high interest rates in order to beat inflation.

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Stronger-than-expected profit reports from several big U.S. companies helped drive the market. KVUE, company behind Tylenol and Band-Aids, jumped 15% after reporting stronger profit than expected thanks in part to higher prices for its products. UBER jumped 11% higher after easily topping profit forecasts for the latest quarter.

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Dow component CAT climbed 3% after the maker of heavy machinery reported stronger earnings than expected.

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The whiplash moves for financial markets globally have been the result of several technical factors, not just worries ignited by several weaker than expected reports on the U.S. economy. One is centered in Tokyo, where a favorite trade for hedge funds and other investors began unraveling last week after the Bank of Japan made borrowing more expensive by raising interest rates above virtually zero.

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That scrambled trades where investors had borrowed Japanese yen at low cost and invested the cash elsewhere around the world. The resulting exits from those investments may have helped accelerate the declines for markets around the world.

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Japan’s Nikkei 225 jumped 10.2% Tuesday to claw back much of its 12.4% sell-off the day before, which was its worst since the Black Monday crash of 1987. Stocks in Tokyo rebounded as the value of the Japanese yen stabilized against the U.S. dollar following several days of sharp gains.

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The speed, the magnitude and the shock factor clearly demonstrate how much of the moves were driven by how traders were positioned.

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Still, there is still much caution as further drops could be ahead because of a slowing U.S. economy and sticky inflation. While fears are rising about a slowing U.S. economy, it is still growing, and many economists see a recession in the next year or so as unlikely. The U.S. stock market is also still up a healthy amount for the year so far, and the Federal Reserve says it has ample room to cut interest rates to help the economy if the job market weakens significantly.

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The S&P has romped to dozens of all-time highs this year and is still up nearly 10% so far in 2024, in part due to the frenzy around artificial intelligence technology. Critics have been saying that euphoria has sent stock prices too high in many cases.

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They have pointed in particular to NVDA, AAPL and the other handful of Big Tech stocks in the Magnificent 7 that were the main reason that the S&P set so may records this year. They helped overshadow weakness across other areas of the stock market, which were struggling under the weight of high interest rates.

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A set of underwhelming profit reports recently, kicked off by TSLA and GOOG added to the pessimism and dragged Big Tech stocks lower. NVDA dropped nearly 19% from the start of July through Monday on such concerns, but it rose 3.8% Tuesday and was one of the strongest forces pushing upward on the market.

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In the bond market, Treasury yields climbed to claw back some of their sharp drops since April, which were driven by rising expectations for coming cuts to interest rates by the Federal Reserve.

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The yield on the 10-year Treasury rose to 3.88% from 3.78% late Monday. It had briefly dropped below 3.70% during Monday when fear in the market was spiking and investors were speculating the Federal Reserve could even have to call an emergency meeting to cut interest rates quickly.

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Earnings this week will see: yesterday – PLTR, LCID, UBER, CSX, FOXA, JJSF, DUK and Dow component CAT higher; today – Dow components AMGN and DIS lower, in addition to SMCI, NVO, ABNB, CVS while RL, SHOP, FTNT, WYNN are higher.

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Economic reports will have- yesterday – July ISM Services Index came in a little better than expected at 51.4.