The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Turbulence.
Overseas markets dropped 1-3% and S&P futures weren’t bucking the trend. Futures implied a 30-point drop in the index. That’s about where it opened and the index fell further in morning trading, bottoming at 11 AM, down almost 100 points at the intraday low. The index bounced into lunch, refaded, and then bounced again. The index almost made it back to unch’d in the afternoon. We finished with just a run-of-the-mill down session. Yields fell across the curve as part of the risk-off moves in markets and Fed cut probabilities for December are now 48%.
Mag 7 stocks led the market lower as AI-related angst continues to build in markets. In the run-up to Nvidia’s earnings announcement, we’re experiencing cold feet and worry that prices went too high to justify. Additionally, markets are worrying about the health of the economy, specifically the labor market. As economic data begins to publish, the realization that prices are essentially 2 months in front of known data is rattling investors. So far, actual numbers aren’t breaking the prevalent narrative but the worry is that a shoe is about to drop, and it is growing.
We already discussed the fact that volatility would, and should, increase as we experience a economic data releases that catch us up to the present. I did not expect the volatility to build in advance of the releases, but that’s what’s happened. Markets are getting nervous about what kind of reckoning we have in store.
This makes total sense psychologically. It also makes no sense rationally. We’ve been trading without this data for two months. We’ve been content, perhaps even complacent, in that time. We’ve relied on alternate sources of data to infer that things have been progressing without much change. We’re about to learn the details. They official data could just as easily be better than we assumed instead of worse. We shouldn’t be adjusting prices until we learn the data.
Yet we are adjusting the prices... not that we needed proof that markets were sometimes more psychological than rational, but here we are.
If I were brave, which I’m not, I would look at the heavy bearish bias that exists out there and go long now. The reflexive dip-buyers have the advantage currently, whether they know it or not. If the data publishes with positive surprises, this nervous market is going to vault higher. The reward for the positive surprise will outweigh the risk of the negative one.
At least as far as economic data is concerned. If Nvidia delivers disappointing guidance Wednesday, the tape is going to sink significantly before we even see the economic data.
Things have gotten bumpy recently and it’s probably going to get worse.
See you tomorrow.
-Mike
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