Market Struggles to Find Support as Negative Factors Align
The big market risk now is that the lows hit on Monday don't hold.
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Following a brief bounce attempt on Tuesday, the market faded badly on Wednesday. The question now is whether the lows that were hit on Monday morning following panic selling in Japan will hold.
While the Bank of Japan has tried to reassure markets that it will not raise rates again, there is continued volatility as the yen carry trade unwinds. It is now about 75% done, but its reverberations will continue for a while.
The situation in Japan has helped to create additional volatility, but the far more important issue now is the slowing economy. JPMorgan Chase JPM economists now forecast a 35% chance that the U.S. economy will fall into a recession in the next few months. Goldman Sachs GS sees a 25% chance of a recession in the next year.
The irony of the worries about the weak economy is that they will push the Fed to finally cut interest rates. The market wrongfully assumed the Fed would start cutting rates long ago, but the strength of the labor market kept it on hold. Now that there is some weakness building, the market is concerned that the Fed did not act quickly enough and that the rate cuts won't stop a potential recession.
This shift in the view of the economy will make Thursday morning's weekly unemployment claims, released at 8.30 a.m. ET, more important than usual. If the report is weak, there will be renewed calls for an emergency Fed rate cut. There were some panicky calls for the Fed to act after the market sold off on Monday, but that subsided to some degree over the last couple of days.
So far, the selling has been index-driven and very correlated. The rotational action that was taking hold back in July has totally fizzed, and instead of leading, the Russell 2000 is back to lagging. While there was some bounce and relative strength in the Magnificent Seven names, that is fading out as well.
At this point, the most important issue is whether the lows hit on Monday morning will hold. There is a failed bounce, but there is still some support on the charts. If the indexes can not hold those lows, then there will be some very negative sentiment, and it will take a while for the technical picture to improve.
It is an extremely tough market environment, and there isn't much to do but play defense and wait for better technical conditions to develop. Trying to bottom fish when bounces do not hold is not a good approach.
We had more index weakness on Thursday morning, but Bitcoin IBIT is attracting interest from speculators.
At the time of publication, Rev Shark was long IBIT.
