Price action
QQQ puked Monday morning following huge moves in Nikkei 225 and JPY in the Asia session, which launched VIX to 65 premarket. However, the 200dma held and QQQ bounced +6.8% from Monday’s low to Friday’s high, helped along by supportive data releases and comments from the BoJ.
Short term, 455-465 looks like tough resistance to break at the first attempt, with the 100dma at 455 lining up with the declining trend line resistance from July’s high. While this looks like a volatility event rather than a fundamental crisis (more below), QQQ may retest panic lows before continuing its progress.
Longer term, QQQ held its upward channel, which is evidence the primary trend remains bullish.
The Fed
Fed speakers continue to emphasise jobs over inflation, teeing up a September cut:
Goolsbee (Mon): Fed has been restrictive, but economy is not overheating, Fed will not overreact to one month’s data, but must pay attention to weakness in the jobs market.
Collins (Thu): if data comes in as expected, then appropriate to ease soon, pace will be data-dependent.
Schmid (Thu): if inflation continues to slow, will be appropriate to ease soon, not quite there on 2% goal, more confidence from recent inflation data, noticeable cooling in jobs, but still healthy.
The next significant data releases are PPI and CPI on Tuesday and Wednesday. If these are disappointing, that could be the catalyst for some stagflationary jitters and a retest of the lows.
What did we learn about markets?
The VIX spiked to 65 premarket on Monday. Two types of environments have prompted similar moves in the past. Type A is a major fundamental crisis, such as the near melt-down of the US banking system in late 2008, or the sudden pandemic shock to the global economy in early 2020. Type B is a volatility event, which is caused by the unwinding of very large leveraged short volatility trades, such as “Volmageddon” in early 2018.
So what did we just experience, type A or type B? Evidence in favour of Type B is that there is no major fundamental crisis in play today. Yes, the US economy is slowing, but it is not in freefall, which the ISM-NM on Monday and IJC on Thursday showed. Credit spreads have widened a little, not alarmingly. Also, we have seen lots of reports of short volatility trades blowing up, in particular JPY carry trades and equity dispersion trades. These positions tend to build up during protracted periods of low volatility then blow up at the next major bump in the road - in this case caused by the BoJ hike plus weak US jobs data. These episodes are a recurring feature of financial markets, which we should expect to repeat in the future. Some commentators suggest we are through the worst of this episode (source: Bloomberg.com):
Breadth
Breadth is neutral. After a big negative move early in the week, things have stabilised.
Sentiment
Significant swing lows in QQQ are usually accompanied by a washout in sentiment. We saw a major panic in the VIX on Monday. We also saw the widespread appearance of “anxious trader photos” across financial media early in the week. This is of course an imprecise indicator, but these guys tend to show up near lows.
Wall Street Journal:
And others:
Meanwhile IB positioning surveys suggested a spike in bearish sentiment (source: themarketear.com):
The options market also suggests capitulation (source: themarketear.com):
Seasonality
Seasonality is consistent with a case of summer troubles as opposed to systemic danger.
Summary
Price action: QQQ bounced near its 200dma and rose more than +6%. VIX spiked to 65 but collapsed to 21 by the end of the week. The primary trend channel in play since early 2023 remains intact.
The Fed: the Fed continues to tee up a September cut.
Breadth: recovered during the week.
Sentiment: early in the week we saw signs of the sort of panic which can accompany a swing low.
Markets: we may have seen a volatility event play out rather than a fundamental crisis.
Key events next week: PPI, CPI, IJC
PS, an explainer for the weekly slide can be found here:
https://chartnotes.substack.com/about
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