Three Weeks of Market Agony: Is the Bottom Near?
From Euphoria and Complacency to Recession Fears - Tech Punished and Economy Indicators Deteriorating
After three weeks of accelerated fall from the peak, the market is in turbulent waters
The anticipated decline to 5400 occurred as expected; however, the subsequent bounce proved temporary. As highlighted in last week's analysis, a crucial condition for a sustained upward move was the VIX staying below 16.39. Unfortunately, this did not happen.
Subscribers Forewarned: VIX Chart Predicted Volatility Spike
For subscribers, the educational edition published on Wednesday included a VIX chart specifically warning about a surge in volatility. The events since Thursday have been an evidence of market gyrations, living up to that prediction.
Another support level was unlocked, with a potential reversal daily candle printed by a very turbulent session on Friday that have changed the sentiment radically, the market passed from A.I. euphoria an negation of technicals to recession fears in a matter of days.
Mag 7 Disappoints, Over-reliance Takes its Toll
The group of the seven technology mega-caps generally underperformed in earning reports, with only META meeting the street’s expectations. This over-reliance on a small number of companies is now taking its toll on the market. As I've been anticipating since April, having 30% of the market represented by a handful of stocks isn't inherently problematic – unless those stocks suffer from weak fundamentals. Today, the market is punishing companies with good fundamentals but growth and/or earnings forecasts that fall below expectations.
Perspective: Not a Repeat of 2000, But Valuations Are Adjusting
While this situation isn't a repeat of the 2000 tech bubble, and Tesla is no Pets.com, it's worth noting that some P/E ratios are returning to more reasonable levels in light of recent earnings reports.
Analyzing Key Sectors and Strength in Current Levels
Continuing the previous edition, I'll be rotating some of the chart analyses. While coverage will continue for US Indices, Bitcoin, GDX, and the MAGA 7, I'll be providing context on two additional sectors crucial to the SPX today. Additionally, oil (OIL) will be analyzed, and further charts will be provided for NDX and SPX to explore the potential strength of current levels.
Last week I provided context about the low likelihood of an interest rate cut, and the educational content on Wednesday was about the inverted yield curve, let’s talk about the catalyst of the selloff on Friday, apart from AMZN’s disappointing earnings report, something that I also mentioned as a possibility in previous editions.
For the inverted yield curve educational content click here, understanding that topic is a must at this stage of the economic cycle:
https://smartreversals.substack.com/p/inverted-yield-curve-ticking-time
Job Growth Stalls Sharply in July, Unemployment Rises
The U.S. labor market experienced a significant setback in July, with non farm payrolls increasing by just 114,000 jobs. This figure represents a steep decline from the downwardly revised 179,000 jobs added in June and falls well short of the anticipated 185,000.
The unemployment rate climbed to 4.3%, its highest level since October 2021, raising concerns about a potential recession. This metric has historically served as an early warning sign of economic downturns.
While sectors such as healthcare (+55,000), construction (+25,000), government (+17,000), and transportation and warehousing (+14,000) contributed to job growth, these gains were insufficient to offset weakness in other areas of the economy.
Average hourly earnings increased by a modest 0.2% for the month, below expectations of 0.3%, and rose 3.6% year-over-year, slightly under the forecast of 3.7%.
These disappointing labor data point to a potential slowdown in economic activity and have heightened recession fears.
Two Charts for SPX, and Two Charts for NDX Analyzing the Current Levels: