8/6 Daily Plan: Drawing a Pathway back to Market Normalcy
Due to recent severe market volatility, I’m going to make most of this post public for all our readers. Make sure to subscribe below for latest commentary.
Hey Everyone - much of my existing views have been discussed from the previous 8/5 daily plan and my thinking since then is unchanged. Since the pre-market lows yesterday until today, we are beginning to potentially form a bottoming process. Bottoming processes are very messy and could take weeks to resolve. For the time being, I think it is possible that we have made a local low.
A lot of investors may be wondering questions such as “has the market peaked” or “will we reclaim 2024 highs”? Based on my assessment of the current situation, I would say the market has not yet peaked and that yes we will eventually (key word: eventually) reclaim all time highs. The observation though is that this will take time to repair market structure damage that has been done since July. To make sense of this market, I’m going to detail out the type of pathway that has led to the current market correction (Nasdaq down -15% from peak, S&P 500 down -10% when accounting for intraday highs/lows). I’ll use the Nasdaq 100 as the reference points. I’m going to use rough estimates as this keeps the discussion at a high level (which is most helpful during times of high volatility).
Pathway towards current Tech Correction
-July CPI Report (for June Data): Responsible for roughly -300-400 points on NQ. This marked the peak of tech for the year at 21,000 (NQ September Contract). This corresponds to 500-505 on QQQ ETF.
-Mid-July Semiconductor Export Curb News: Responsible for roughly -500-600 points on NQ. This brought the index from 20700 towards 20000 in about 2 sessions.
-Big Tech Earnings Google sparking fears that AI Capex spend isn’t yet leading towards a clear ROI yet for revenue/profits: Responsible for roughly -600-700 points on NQ. This brought the index from 19700 to 19000-19100 in 1 session.
-Fed FOMC Failed Breakout : Responsible for roughly -500 points on NQ. This reversed the attempted recovery back to Google’s earnings date at 19700 back to 19000.
-July NFP Report (for June Data): Responsible for -500-600 points on NQ. This brought the index from 19000 to around 18500-600.
-Yen Carry Trade Narrative: Responsible for roughly -500-600 points on NQ in the regular cash session. Overnight it had led to almost a -1200 point selloff to 17350 as the local low. NQ closed at around 18000 on 8/5/2024. This is about 435 on QQQ ETF.
*We’re around 18300-400 as of this post on 8/6/2024*
Much of the above catalysts also happened at the same time as the “rotation” into small caps and value stocks in July when the Russell soared 10%+.
As we can see, market forces threw about 6-8 big Macro disturbances at the market and this caused a -15% decline for the Nasdaq within the span of 30 days.
By this same logic, in order for the market (QQQ ETF and SPY ETF) to recover back to all-time highs, we will need a couple things working in the background:
-Time: In order for markets to recover, there needs to be a base building period to fade investor anxiety. Every day/week that there isn’t a new “problem”, the VIX will face natural downside pressure due to its natural state being in Contango (whereas it is in Backwardation right now). This means that as long as “nothing bad happens” in the macro environment, the market now has a modest upside mechanical drift bias (though it will be volatile) until VIX revisits more friendly territory sub 20.
-Catalysts: If 6-8 macro disturbances caused the correction, we will need an equivalent number (or more) to get back to the original point. A couple imminent catalysts that could further provide relief is if 1.) Iran/Israel war rhetoric is less severe than anticipated 2.) continued strong earnings prints from the rest of S&P 500 this week and next. Looking out towards month end, Nvidia’s earnings report is a Catalyst that could be very helpful to markets. However, how NVDA trades up until the day of earnings is also a consideration. Generally speaking, entries from the Bear Case on NVDA 90-95 or even the Base Case 105-110 should be good positions in my opinion. Jackson Hole where Fed gives additional color on future of rates could also be a catalyst.
-Expected Resistance: Every macro disturbance over the past month leaves a market structure “barrier” to overcome when markets revisit that point. This is also known as resistance (or a backtest of resistance). Bears will try to push down markets at the reference points above. Looking at the big picture, I would say NQ faces several macro tests at 18500 (NFP Selloff Close), 19000 (FOMC Failed Breakout Reversal), 19700 (Google AI Capex Disappointment), 20000 (Semi Export Curb shock), and 20700 (CPI Data to spark rotation into small caps).
It will take a combination of Time + friendly Catalysts to melt up through these resistances which have been created during the July selloff. The nature of any future bullish catalyst will also indirectly determine how strong/weak the previous support levels are. Without concrete catalysts, short covering rallies (while nice) can only take us so far in the recovery pathway.
-Larry