Market Milestones: Strength Among Carnage

So much has happened since the last Market Milestones! Even if you didn’t read a single word, it had a scarily accurate image predicting this week’s volatility. Let’s run through a high-level recap of the milestones from this crazy, volatile market.

The BOJ (Bank of Japan) raised interest rates in an effort to strengthen the yen against the dollar. This caused an unraveling of the yen carry trade, which crashed pretty much everything. Since it was the weekend, everyone sold all their crypto because it was the only thing available to sell, and they had not listened to the Bitcoin Standard recently enough to avoid being paper-handed scaredy-cats. Monday morning mayhem ensued, as the VIX broke out to the 3rd highest level in history and the SPY gapped down 4% with many stocks down double digits.

SPY

Buyers jumped all over the opportunity to buy the dip, and the bearish gap faded all day Monday. Since the very scary yen carry wary…ness, we have seen choppy price action as the market decides if this was the start of something bigger or just an opportunity for some sweet summer sales. The BOJ has already pivoted back to the soft, sweet little doves everyone knows and has grown accustomed to over the last several decades.

The markets are now pricing in a vast amount of cutting from the Fed over the next few months, with a base case of 4 cuts before year-end. The market has jumped the gun previously with the amount of cutting expected this year, doubting Jerome Powell’s steadfast commitment to "higher for longer." So far, Jerome has held strong, but I think one thing we know is that if there is any further weakness in the US economy, the Fed will turn the money printer back on faster than you can say “transitory inflation.”

The big question on everyone’s mind is, "What comes next?" That’s actually the ever-present question on every trader’s mind. As investors and traders, we are constantly trying to answer that question, but our main job is to formulate a plan and a risk management contingency for when we are wrong. The Nasdaq and the S&P 500 are sitting at a precarious level that makes another rollover to new lows equally as plausible as a nice little push higher. Generally, after such a big sell-off and massive spike in the VIX, the markets take a while to recover. During that time, they chop around, forming some variety of double bottom. A push higher into new highs is possible but is a lot to ask after such a big drop. However, a push into the pink trendline seems very plausible in the not-too-distant future. If that happens, risk can be mitigated on all positions that were bought this week. Collars could be added to positions that are profitable, and stops could be trailed while partials are taken. If you bought anything Monday morning, you are already profitable and could be taking protective measures in case the market rolls over from here.

There is a lot of weakness in this market but there are a few stand outs that are looking nice and bullish. Look for strength in this market as opposed to grabbing wildly at falling knives. META is the standout amount the big tech names right now. It is looking very strong while the majority of big tech is struggling to go higher after their earnings reports. META fully retested its bullish earnings gap on the general market weakness but has nearly recovered fully to its earnings gap open. META closed above the 100DSMA, retested it on Wednesday and pushed higher on Thursday. It is just 6% below its all-time high, so about a day and a half of strong price action from a new all-time high.

META

A few of the semiconductor stocks also are looking pretty nice after Thursday’s bullishness. NVDA, AVGO, and TSM are looking relatively strong, while many of the other previously strong AI names like MU, LRCX, and QCOM have broken key supports and will take longer to recover. Then there is INTC which apparently does the opposite of artificial intelligence and is down 50% in the last 21 days. The RSI on INTC just hit a level not seen since the 1987 crash, so sure, it’s probably in for some kind of bounce, but INTC is in serious trouble based on the chart.

 AVGO