Rise and shine everyone

Yesterday’s BoJ comments that saw the market reversal continue was short-lived. Asian markets traded within normal ranges but, didn’t catch much of a bid. China and Hong Kong closed higher. And if that wasn’t enough, Japan was just hit by an earthquake and is now on Tsunami alert.

As for the US markets, we sold off into the close, after a bounce in the past two days. We talked about this on Tuesday, and in my opinion, the selloff is not done.

European indices opened lower and continued to decline in early trading. Financials and telecom sectors performed relatively well, while technology and consumer discretionary sectors led the losses. Siemens shares dipped slightly following a reduced outlook for its Industrial unit and negative comments on the Chinese market. European markets have had the lowest bounce back, as growth fears and earnings continue to weigh there.

Early stages of this Drawdown

The chart below is for the GS momentum basket which typically sees very severe and sharp drawdowns every year, but this year has been “mild”. However, this gives me the idea that we’re probably just in the first phase of this drawdown. I say this with the view that it’s better to be prepared.

We now have a situation where leveraged longs rushed to the exit on Friday and more so, on Monday. That level of volatility needs to work its way through the system. It could take a few weeks.

This is not the fearless market from several weeks ago. Therefore, position sizes will be taken down, as people trade more cautiously. People going long this market may do so with low conviction because there are still downside risks to come.

Next week, we have earnings from Retailers and given what we’ve been hearing on the earnings calls, we’re likely going to see more guidance for an economic slowdown, adding to the fear. We also have CPI, PPI, and Retail sales numbers that could balance some of that fear.

Next up, we have the Fed minutes on Wednesday - this may actually provide some relief because we didn’t see the Fed panicking in the slightest during the last meeting.

The following week (Aug 21 -22) we have Jackson Hole. Given the series of events and calls about the Fed being behind the curve, we’re likely to see some reassurances being provided.

So while we may get a series of mixed news in the upcoming days, it still means the market remains uncertain and volatile.

US Jobless Claims in Focus

After Friday’s unemployment print, it would seem that everyone is heavily focused on jobless claims. Mayhem reminds me that the jobless claims are only for workers that have been in the workforce for a while, so they are not completely representative of what’s happening in the labor market. Nor are they representative of the gig economy workers.

Nevertheless, it is an important metric to watch and it’s certainly been inching up over the past year. I like to look at the 4-week average, as it smoothes some of the noisiness in the weekly data. We can see a definite trend here, with the claims increasing. So the more people being fired, the higher the claims.

Earnings warnings

We continue to get warnings on earnings calls, this time from ZipRecruiter:

"..interestingly, verticals like finance and technology remain weak as they have been, and verticals like education, which was strong for a long time as there was a catch-up in the number of teachers that needed to be hired after the pandemic, has started to weaken on a year-over-year basis now"

We keep getting anecdotal evidence that the market is weakening.

Chart of the Day

I continue to insist that it was earnings and questioning AI valuations that started this selloff. This chart adds credence to that theory.

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)