1. Moving the market

After the intense selling pressure during the first three trading days of August, which drove the S&P 500 down by over 6%, equities rebounded today, recovering some of their losses. Whether this marks the end of the downturn or is merely a relief bounce remains uncertain.

The tech sector also saw a recovery, with major players like Nvidia and Meta advancing, although Apple continued to show weakness, losing 1%. Contributing to the renewed bullish sentiment was a rebound in Japanese stocks, following the Nikkei index’s worst day since the 1987 crash.

Volatility is likely to remain high, and this correction may be far from over. Concerns about the state of the economy persist, and the Japanese carry trade is still unwinding. This could lead to further market pressure in the coming weeks, with ongoing worries about inflation, debt, and deficits adding to the uncertainty.

Given these circumstances, reducing exposure to more volatile sectors in favor of less volatile ones seems prudent. The Japanese Yen continued its rebound from yesterday’s lows, prompting speculation that the Bank of Japan may have quietly intervened to provide support.

This turnaround Tuesday also benefited the major indexes, with the S&P 500 receiving a boost from algorithms that lifted the index to its 100-day moving average, only to reverse direction at that level.

The most shorted stocks experienced a squeeze but encountered overhead resistance. The MAG7 basket made a comeback but fell short of reaching yesterday’s starting point. Bond yields rallied, with the 2-year yield testing the 4% level again.

Meanwhile, rate-cut expectations dropped, the dollar staged a comeback, and gold temporarily surrendered its $2,400 level. Crude oil slipped, but Bitcoin bounced higher, testing its $57k level and advancing by 6%.

Bloomberg summed up an old cliché about turnaround Tuesdays:

“The bad news is such recoveries don’t guarantee a bottom has been reached.”

1. Moving the market

Last week’s selloff spread globally and accelerated this morning as traders grappled with fears of a U.S. recession. The downturn began in Japan, where the Nikkei plummeted over 12%, marking its worst day since the 1987 Black Monday crash. Contributing to the turmoil was Japan’s recent decision to hike interest rates, which disrupted the highly leveraged yen carry trade and triggered a cascade of selling and forced liquidations worldwide.

In the U.S., the Dow Jones Industrial Average dropped over 1,000 points, or 2.6%, while the Nasdaq fared even worse, losing 3.4%. The release of July’s jobs report on Friday exacerbated the situation, convincing traders that the Federal Reserve is behind the curve in cutting rates to address the current economic slowdown.

Mega-cap tech stocks were hit hardest, with Nvidia falling 6%, Apple 5%, and Tesla 4%. Broadcom and Super Micro also declined by 1% and 2.5%, respectively. Notably, only nine stocks in the S&P 500 ended the session higher.

At their lowest points, Small Caps and the Nasdaq were down 6% before dip buyers stepped in to limit the damage. The most shorted stocks were heavily impacted but managed to recover some ground late in the session.

The MAG7 stocks suffered significant losses, now down an astonishing $3 trillion from their record highs. The AI sector also faced a rapid decline, falling below its 200-day moving average. Bond yields were volatile, initially collapsing before rebounding to nearly unchanged levels.

The dollar weakened, crude oil retreated but later recovered, and gold experienced wild swings before bouncing off support. Bitcoin also took a dive as traders liquidate assets to meet margin calls, but it found support at the $50,000 level.

In my advisory practice, we sold a major tech ETF and closed our position in the international market after the International TTI dropped below its long-term trend line.

The future direction of the market now hinges on the Federal Reserve’s response.

Will they panic and implement an emergency rate cut to prevent equities from plunging further?

1. Moving the market

The markets faced a significant downturn today, as weak economic data erased an early rally. Major indexes dipped into the red, with the Nasdaq dropping 2.3%, effectively wiping out most of yesterday’s gains.

Initial jobless claims surged to 249,000 for the week ending July 27, surpassing the estimated 235,000. Additionally, the ISM manufacturing index, which reflects economic activity, fell to 46.8, reinforcing my view that the economy is slowing down. In summary, today’s bad news was genuinely bad for the markets, unlike previous instances where bad news sometimes had a positive effect.

Although the Federal Reserve left interest rates unchanged yesterday, this type of data might prompt the central bank to lower rates at their September meeting. However, if inflation remains uncontained, despite traders’ beliefs, the Fed could face a challenging situation, potentially leading to stagflation.

The S&P 500 experienced a sharp decline, losing its 50-day moving average and marking its worst start to August since 2002. Yesterday’s beneficial short squeeze disappeared, with the most shorted stocks plummeting 8% from yesterday’s highs, as noted by ZH.

The MAG7 stocks saw a dramatic reversal, with an early morning 2.5% gain turning into a nearly 5% drop, erasing $430 billion in market cap. Semiconductors followed this trend, hitting their May lows.

Unsurprisingly, bond yields fell, Bitcoin tested its $63,000 level, crude oil prices dropped after initially rising due to Middle East tensions, while gold remained steady.

With volatility on the rise, tomorrow’s jobs report and Amazon’s earnings could further confirm an economic downturn.