It’s the random selloffs that really get you thinking
It’s nice when things in markets seem to happen for a reason.
August 2 selloff? Unexpectedly weak jobs report exacerbated by a yen carry trade unwind.
August 23 strong gains? Fed Chair Jay Powell green-lights an easing cycle starting in September.
But today’s near 2% selloff in the S&P 500 is noteworthy for the lack of any easy narrative we can use to wrap our heads around it.
Yes, its the beginning of a seasonally weak month. But we don’t usually get off to starts this bad.
Were the US manufacturing surveys (from S&P Global and the Institute for Supply Management) released this morning a little weak? Yes. But not that bad. And so what? Those metrics not been the greatest of guides for the overall stock market this cycle. Sure, all trended down in 2022. But if you were waiting for both of these to be in expansionary territory (above 50) before re-engaging in the market, you missed out on about a year and a half’s worth of gains.
I suppose at this juncture, any cyclical data on the soft side is probably going to impede the ability of more seemingly cyclical parts of the market like banks, small caps, or industrials, to post strong gains.
On the other hand, as of 2:40pm, the VanEck Semiconductor ETF is down 7.2%, which would be its worst day since 2020.
Semiconductors are getting shellacked for... what reason exactly?
Is it because the Semiconductor Industry Association released July sales figures (up nearly 19% year-on-year) that some on Wall Street deemed underwhelming? With all due respect to that organization, I have not exactly seen their monthly reports frequently highlighted as a key catalyst for the industry group in the equity market.
Conversely, the significant amount of options activity surrounding Nvidia’s earnings kept the stock relatively pinned last week, and there is now scope for more discretionary pent-up selling activity to dominate. But that’s also a highly speculative thesis.
A couple takeaways/thoughts:
This is another reminder, to paraphrase Michael Purves at Tallbacken Capital, that the tech rally is the equity rally. It’s simply asking too much of the rest of the equity universe to offset weakness in tech — even half of tech.
Ahead of this Friday’s jobs report, the labor market is being treated as though it’s guilty until proven innocent (even though recent readings of initial jobless claims should presumably quell fears of a rampant, ongoing deterioration). “It’s kind of wild how we are breaking down the same way, and at the same time – right before the jobs report – as we did last month,” said independent trader Dave Roberts.
Stepping back, it’s important to be comfortable not knowing what the heck is going on sometimes, or else you’ll drive yourself crazy, overtrade, and probably miss out on gains. After all, was anyone stressing when Nvidia was going up 4% every other day on seemingly no news?
