3 Factors Align for Bounce Action, but Don’t Be Too Trusting
Nvidia is finally bouncing after six straight down sessions.
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We have bounce action developing Tuesday morning, with the Nasdaq 100 (QQQ) up about 1%. The reversal started overnight in the semiconductor group (SMH) before extending into the U.S. session.
No single major headline is driving the strength. Instead, we have a better mood built on three things converging for the first time in weeks.
Oil, Bonds, and Chips Are Finally Agreeing
The most interesting movement is in oil, which is down about 3% on optimism that the economic pressure on Iran may be producing results. Treasury Secretary Bessent announced Operation Economic Outcast on Monday, a set of expanded sanctions he described as the greatest financial offensive ever, extending to any country that continues doing business with Iran.
Investors appear optimistic that this approach may finally yield some results after months of frustrating negotiations. The Iranian currency, the rial, hit a record low of roughly 2.02 million to the dollar Monday and the IMF is projecting that Iran’s annual inflation is at nearly 69% this year. Oman’s foreign minister is in Tehran today to discuss the Strait of Hormuz, Pakistan’s army chief met Iranian officials Monday, and Iran’s security chief changed his tone about the memorandum of understanding rather than rejecting the framework outright.
Bessent is holding back on imposing the largest penalties despite his economic D-Day language, which is helping to temper some of the concerns about the economic fallout.
Lower oil is reducing some economic pressure, and bonds are responding. The 20+ Year Treasury Bond Fund (TLT) is higher, which relieves the yield problem that has been hitting the high-multiple names hardest. That is why the chips and the Nasdaq are leading rather than the defensive groups that led on Friday and Monday.
This is the first time in weeks that there is some correlation among the various catalysts. Last Wednesday’s bounce came from a Treasury buyback and a biotech short squeeze while bonds sold off again within a day and oil went the wrong direction. There has been inconsistency under the surface but Tuesday things look aligned and that is providing some juice.
Nvidia Positioning Is Part of It
Nvidia (NVDA) was headed for its longest losing streak since 2022 before a bounce early Tuesday morning. Nobody has been selling the largest company in the market for six straight sessions because they expect a bad report. They sell because they do not want exposure into a binary event. That selling has helped to reset the expectations embedded in the price even though the estimates have not moved, and analysts still see record sales around $92 billion.
Some of Tuesday morning’s strength is traders putting back the risk exposure to Nvidia which they have reduced. A market that has already anticipated a negative reaction is much easier to please than one that has been buying into the report.
Do Not Get Carried Away
The important issue here is that this is just one day of some positive alignment. There is no reason to trust that this action will be sustained. This is a continuation of the recent pattern of ups and downs as we struggle with seasonality and a slow market.
We have been here several times this summer. Oil collapsed below $80 in late July when President Trump halted the strikes, and then ran back above $91 within two weeks. Optimism about a resolution has been a recurring theme and there is a great likelihood that this drama will continue to drag out for a while. Even if Bessent’s economic sanctions are effective it isn’t going to happen overnight.
The 30-year is still above 5% and one good session does not undo a 19-year high. Nvidia reports Wednesday after the close, which means everything that happens Tuesday is just a setup for the reaction.
Game Plan
My positioning has not changed and a better mood does not change it. My mantra recently has been plenty of cash and selective buying. That does not change.
I may look for some day trades if the opportunities arise but I’m not rushing to build any big positions right now. We still have a long way to go before seasonal conditions improve and we start anticipating third-quarter earnings.
At the time of publication, Rev Shark had no positions in any securities mentioned.
