Bulls Are Hopeful the Worst Is Over, But Volatility Will Stay Elevated
While the market is in a more positive mood to end the week, these four issues are likely to keep things choppy.
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Market volatility has been at the highest level in years this past week. One of the worst days for the indexes since 2022 hit on Monday, but that was followed by the best day for the S&P 500 since 2022 on Thursday. It isn’t unusual to have that sort of reflexive rebound, but it makes for challenging trading when the market mood shifts so quickly.
There is growing optimism Friday morning that maybe the worst is over. Softer-than-expected unemployment claims on Thursday morning cooled off some of the concern about a looming recession. On Monday, a number of pundits and strategists were calling for an emergency Fed rate cut, but that quickly subsided. Odds of a 0.5% rate cut at the September Fed meeting have fallen from over 80% to 50%, and interest rates have rebounded after a sharp spike lower.
While the market is in a more positive mood to end the week, there are still quite a few issues out there that are likely to keep volatility elevated. First, the yen carry trade is not completely unwound. Any movement in Japanese interest rates or the yen could trigger another sizable mover.
There also is still quite a bit of uncertainty about what the Fed will do next. While there is near certainty the Fed will cut rates at the meeting in September, the size of the cut and the level of dovishness is in flux. There are still Fed members who are unconvinced that the economy is cooling fast enough to warrant aggressive action.
Another major issue is whether the market is willing to embrace the Magnificent Seven names again. Nvidia NVDA and other big-cap technology bounced strongly on Thursday, but will they continue to trend higher from here? Is Warren Buffett’s sale of Apple AAPL an indication that valuation may be a headwind?
Technical traders are looking for a follow-through day for the Nasdaq. Another day of large gains on increased volume would provide some comfort that upside momentum has been restored and would trigger increased fear of missing out.
One problem the bulls face is that the market is now entering the historically worst period of seasonality from August through September. September is, on average, the weakest month of the year.
The good news is that this bout of volatility has shaken things up, and now there is more focus on individual stock picking as investors look for stocks that have been mispriced. The action has been quite correlated as it has been driven by indexes and ETFs, but it always creates more trading opportunities.
We have a strong open for equities developing Friday morning as interest rates start to ease once again.
At the time of publication, Rev Shark had no positions in any securities mentioned.
