Roller Coaster of a Market The selling started on day one. On day three, a weakening U.S. jobs market sparked concerns over a possible recession, and a popular hedge fund trade linked to the Japanese yen blew up. The S&P 500 lost 3% and the Dow plunged more than 1,000 points - its worst sell-off in two years.
Within the first three trading days of August, the Nasdaq had entered correction mode (down 10%). Apple was down 12%. Tech bellwether Nvidia was crashing more than 20%.
The roller coaster train had disengaged from the lift and down we were going, gravity at its most terrifying.
Within the first three trading days of August, the Nasdaq had entered correction mode (down 10%). Apple was down 12%. Tech bellwether Nvidia was crashing more than 20%.
The roller coaster train had disengaged from the lift and down we were going, gravity at its most terrifying.
It wasn’t supposed to be like this. Fundstrat’s Tom Lee said, at the end of last month, “We see a risk-on rally starting [July 31] that could add +100 points to the S&P 500 in the next five days.” This, from a man who gets it right more often than not.
But here’s the thing about roller coasters. After all the screaming, you tend to end up pretty much back where you started. Once the so called yen “carry trade” was properly analyzed and deemed not to be a threat to the overall market, and once additional employment and inflation data largely alleviated recession fears, buyers came back in. Two weeks into the month, and we were right back to where it all began.
"What we saw (on Aug. 5) was a unique confluence of events," said Steve Sosnick, chief strategist at Interactive Brokers. "I think it's also quite remarkable how quickly everyone reverted to the same playbook that has been working for them once it was established that those events appear to be temporary."
It’s enough to give you whiplash. And a reminder why I no longer ride coasters.
We Still Had Two Big Events to Get Through in August.
Fed Speak at Jackson Hole, Wyoming - Check. On August 23, Federal Reserve Chair Jerome Powell delivered an absolutely clear message to financial markets: “The time has come for interest rate cuts.” It’s a moment Powell had been warming up to for months. Powell left his options open as to whether he will start with 25 or 50 basis points (0.25% or 0.50%), but cuts are coming beginning in September. Markets reacted positively.
Nvidia’s Quarterly Earnings Report - Check. This was all the talk for days leading up to the report. If they missed, there was the fear of a whole-market collapse. Or at least the collapse of the AI trade – which had undergirded the market for the entire year. If they beat, as Wedbush’s Dan Ives believed, it would herald in “the beginning of the next bull market.”
What happened? On August 28, they reported a beat – but not as much as the high-expectation “whisper” numbers. And they guided up – but not so much as to satisfy some investors. The next day, the stock sank 6% and change, bringing the price down to levels not seen since… 10 days prior.
"This is a great company that is still growing revenue at 122%,” wrote Ryan Detrick, chief market strategist at Carson Group. “But it appears the bar was just set a tad too high this earnings season."
Now, anything can happen in the next few days, but I think it’s telling that the market didn’t collapse. The S&P 500 closed flat and the Nasdaq only slightly down. AI movers and shakers Apple, Microsoft, Meta and others, were green for the day. Many of the other chip names held their own, as well.
And life goes on.
How is September Shaping Up?
I forecast turbulence. Keep your seatbelt fastened.
And For What It’s Worth…
Italian fashion house Dolce & Gabbana recently debuted Fefé, a designer fragrance just for dogs. According to the company, it’s an “olfactory masterpiece” with hints of musk, sandalwood, and ylang-ylang. For the uninitiated, ylang-ylang features romantic floral notes nuanced with aspects of creamy, balsamic and powdery custard, intoxicating jasmine, sweet, slightly pungent banana, and sensual, sugary honey.
“I am delicate, authentic, charismatic, because I’m not just a dog, I’m Fefé,” said an ad for the new product—which is named after co-founder Domenico Dolce’s own pup. A 3.4 ounce bottle of Fefé retails for $109.
An olfactory alternative for the budget conscious? Soap and water.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
But here’s the thing about roller coasters. After all the screaming, you tend to end up pretty much back where you started. Once the so called yen “carry trade” was properly analyzed and deemed not to be a threat to the overall market, and once additional employment and inflation data largely alleviated recession fears, buyers came back in. Two weeks into the month, and we were right back to where it all began.
"What we saw (on Aug. 5) was a unique confluence of events," said Steve Sosnick, chief strategist at Interactive Brokers. "I think it's also quite remarkable how quickly everyone reverted to the same playbook that has been working for them once it was established that those events appear to be temporary."
It’s enough to give you whiplash. And a reminder why I no longer ride coasters.
We Still Had Two Big Events to Get Through in August.
Fed Speak at Jackson Hole, Wyoming - Check. On August 23, Federal Reserve Chair Jerome Powell delivered an absolutely clear message to financial markets: “The time has come for interest rate cuts.” It’s a moment Powell had been warming up to for months. Powell left his options open as to whether he will start with 25 or 50 basis points (0.25% or 0.50%), but cuts are coming beginning in September. Markets reacted positively.
Nvidia’s Quarterly Earnings Report - Check. This was all the talk for days leading up to the report. If they missed, there was the fear of a whole-market collapse. Or at least the collapse of the AI trade – which had undergirded the market for the entire year. If they beat, as Wedbush’s Dan Ives believed, it would herald in “the beginning of the next bull market.”
What happened? On August 28, they reported a beat – but not as much as the high-expectation “whisper” numbers. And they guided up – but not so much as to satisfy some investors. The next day, the stock sank 6% and change, bringing the price down to levels not seen since… 10 days prior.
"This is a great company that is still growing revenue at 122%,” wrote Ryan Detrick, chief market strategist at Carson Group. “But it appears the bar was just set a tad too high this earnings season."
Now, anything can happen in the next few days, but I think it’s telling that the market didn’t collapse. The S&P 500 closed flat and the Nasdaq only slightly down. AI movers and shakers Apple, Microsoft, Meta and others, were green for the day. Many of the other chip names held their own, as well.
And life goes on.
How is September Shaping Up?
- With a rate cut by the Fed appearing all but guaranteed in September, “good news is good again, supporting soft-landing forecasts,” says Morgan Stanley.
- SoFi’s Liz Young Thomas agrees. “The data right now suggests that positivity is warranted.” But she goes on to caution: “What we learned a couple of weeks ago is that the market is not bulletproof. We have to remember that the Fed is cutting into a weakening economy, and it can get dicey.”
- “A neck-and-neck race between former President Donald Trump and Vice President Kamala Harris means additional uncertainty for investors ahead of the Nov. 5 U.S. presidential election,” says Chase Investment Counsel President Peter Tuz. “As well, turmoil in the Middle East and uncertainty over how many interest rate cuts the Fed will deliver make it particularly difficult right now to forecast the stock market.”
I forecast turbulence. Keep your seatbelt fastened.
And For What It’s Worth…
Italian fashion house Dolce & Gabbana recently debuted Fefé, a designer fragrance just for dogs. According to the company, it’s an “olfactory masterpiece” with hints of musk, sandalwood, and ylang-ylang. For the uninitiated, ylang-ylang features romantic floral notes nuanced with aspects of creamy, balsamic and powdery custard, intoxicating jasmine, sweet, slightly pungent banana, and sensual, sugary honey.
“I am delicate, authentic, charismatic, because I’m not just a dog, I’m Fefé,” said an ad for the new product—which is named after co-founder Domenico Dolce’s own pup. A 3.4 ounce bottle of Fefé retails for $109.
An olfactory alternative for the budget conscious? Soap and water.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
RSS Feed