Market sentiment continues to improve after early pullback.
US traders have managed to stabilize the market after the worst day in Japanese stock market history. The market is trying to digest the decline in carry trades and the rapid and widespread deleveraging in an uncertain economy.
Helping to improve the situation today were a pair of US economic indicators that showed the services sector was stabilizing. Goolsbee of the US Federal Reserve also expected calm and stability to be a factor.
At some point, these moves are quite emotional and overextended due to leverage and options, but some strong hands have stepped in. US Treasury yields are now up on the day at 10, and the Nasdaq has more than halved its decline. S&P 500 futures are down 2.4%.
Daily Spos
In commodity markets, gold recovered about half of its losses while oil stabilized during the day.
Bitcoin was one of the first things to move and is still very negative but has made some progress, rising from $49,450 to $54,320.
I wonder if there is some greed creeping into the market. There is an emotional reaction to buy the dips in tech stocks that is hard to quell. On Friday, I wrote about why it is hard to do a “hero trade” right now. That was good advice and I will reiterate the four reasons I highlighted:
- The gains since the start of the year have been impressive. Most assets are up significantly this year, and fund managers are sitting on 15% gains. Do you really want to risk that in August? Buy a five-month Treasury note, extract another 2% in margin, and then revalue in early 2025.
- Liquidity is becoming increasingly difficult to come by. I think this problem is becoming increasingly acute. There is so much algorithmic trading, so much leverage, so much congestion that it is impossible for anyone to buy when the dance stops. This leads to unusually large movements in major stocks and bonds.
- The seasons are tough in August/September. Even if you don’t want to wait the whole year, it’s a good idea to take a break here and watch the Olympics instead.
- The Fed is aggressive in its interest rates. Should the Fed cut rates by 50 basis points in the next two meetings? Yes. Will it? I think the odds are very high in the market. The Fed will be stubborn, as Barkin and Goolsbee’s comments suggested.