I was sitting in a beach chair enjoying an adult beverage of my choice on Fernandina Beach last Sunday when my cousin asked “You think this market’s gonna rebound?”
I said “yeah, probably Monday…”
The waves were great because Hurricane Debby intensified as it made landfall on the western coast of Florida. The storm front hitting the stock market was about to intensify too…
My cousin could’ve ribbed me pretty good Monday, when the Dow Industrials was down over 1,000 points, but he’s a good guy. And in any event – stocks did put in their lows last Monday….at least for now.
It’s common for investors and traders alike to look back on steep sell-offs and think of them as a pause that refreshes, taking a little froth out of the market, etc. And there is truth to the idea that a good sell-off is healthy – it resets prices and offers up some opportunity to buy at a discount if you’ve got the cojones for it…
Just look at how Apple (NASDAQ: AAPL) traded last Monday. After a $220 close on Friday, August 2, it opened Monday at $199, down 10%. It quickly fell to $196 and then rallied to nearly $210 by the close.
The swing for Nvidia (NASDAQ: NVDA) was even wider – intra-day range between $90 and $103 with a close right at $100. (I said NVDA was going to $95 on July 30.)
Those are big swings, from bellwether stocks. And when you see leaders do what they are supposed to do – leading the market out of the hole – you can jump on for the quick ride.
But let’s not forget the big picture here. This market is not likely to return to wide-eyed bullishness right away.
Here’s a list of the issues:
- The Fed is Behind the Curve – this is the single biggest problem for the market (and the economy) right now. Just like how the Fed was slow to react to spiking inflation in 2022, Chair Powell is waiting too long to ease monetary policy. Unemployment has hit 4.3% – and the trajectory unemployment is on is consistent with previous recessions. That is to say that unemployment has momentum, and when it gets moving it tends to keep moving. It’s pretty likely that the Fed has already missed its chance for the so-called “soft landing.”
- Rate Cut Panic – Remember, the Fed has two jobs: provide price stability and ensure full employment. Sadly, some members of the Fed remain overly focused on inflation (price stability). Some are still not convinced that inflation is moving low enough to cut rates, even as their other mission (full employment) is moving in the wrong direction. When the Fed finally does cut rates in 6 weeks (!) there are two likely scenarios. The first option is that they offer up a measly quarter-point cut. That’s like bailing water out of the Titanic with a coffee cup. The other option is a big 50-point or even 75-point cut. A big cut like that is a panic cut. Such a move will send the message that the Fed has suddenly figured out that it is wrong and is now scrambling to catch up. Don’t forget – inflation is good for asset prices. Rising unemployment is not.
- Stocks are Not Cheap – Nvidia’s Price-to-Sales (P/S) ratio has fallen from 42 to…32. Its main rival, AMD (NYSE: AMD), trades with a P/S ratio just above 9. Eli Lilly (NYSE: LLY) trades for 20 times its sales revenue. Even after its disastrous software upgrade that crashed Microsoft and caused flight cancellations, Crowdstrike (NASDAQ: CRWD) still has a P/S ratio of 18. Overall, the S&P 500 has a forward Price-to-Earnings (P/E) of 21. That’s already historically high. Rising unemployment could very easily lower the “E” part of the equation, which would certainly drag the “P” part down too.
- The Algos Rule – More than 70% of trading is done by machines that use algorithms to make buy and sell decisions. All of these algorithms are basically the same. Of course there will be small idiosyncratic differences, but for the most part, when one is buying they are all buying. And when they are selling, well, that could be a problem. In 2022, the algos crushed the S&P 500 by 17% on two different occasions, and 14% once. At Monday’s lows, the S&P 500 was down 9% from its highs. The selling could get a lot worse.
- It’s the Economy, Stupid – I mentioned the unemployment rate earlier, but there’s more. Payrolls have grown less than expected for the last three months. New job postings are also falling fast. Bankruptcies are on the rise, credit card delinquencies are too, there’s a mini-housing crash going on in Florida and Texas, consumer stocks like McDonald’s, Starbucks, Pepsi, Target and Walmart have all said spending is weakening – there’s more, but you get the point…
The Wall of Worry
One of the defining characteristics of bull market is that they climb the “wall of worry.” That is, bull markets keep chugging higher even in the face of worrisome data or events. Think back to the mini-banking crisis in March 2023 for a good example of a bull market that climbed a wall of worry.
It is certainly possible that the current bull market will cut the sell-off short and start climbing the wall of worry that Hammer and I have been laying out for you over the last month or so…
It is also possible that there is more downside to come and that the U.S. economy is at risk of tipping into recession.
Hammer and I are not perma-bears or goldbugs. We’re opportunists. We’d rather buy stocks than short them. We’ve also both survived the internet bubble, the Great Financial Crisis and countless corrections in between. This market adn this economy still look pretty risky.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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More Trashing of The Fed
https://www.outsiderclub.com/an-angry-stock-market/
Hammer’s Trading Rules are a Must-Read
https://www.outsiderclub.com/dehaemers-55-rules-of-trading/
First Hammer wrote this:
https://www.outsiderclub.com/the-pentagon-index-flashes-red/
Then I saw this:
https://www.outsiderclub.com/nuclear-subs-with-tomahawks/
