Carlsquare weekly market letter: Time for a new bump in the road?

• It should come as no surprise that we are starting the month on a negative note as we enter September, historically the weakest period of the year.
• The talking heads in the media have been warning of this (and yes, we are one of them 😉).
• Keep an eye on Nvidia, HYG, USD, TNX as bellwethers for the stock market. If history repeats itself, there could be some great buying opportunities soon…!

Looking at the incoming macro data, things have started to turn sour. The latest was the US ISM manufacturing data, that came in slightly below expectations.

An easy way to track the macro trend is to follow the evolution of the Atlanta Fed’s GDP forecast model (green line). It is updated after every significant data point and, as you can see, it has a slightly negative bias.

The incoming data is of course a good excuse to trade the market lower. This is a perfect market for traders. Retail investors get scared and sell to reduce risk. This creates volume, which is air for the big traders.

NVDA is falling for no apparent reason, and there is a small sell signal on the MACD.

The entire semiconductor sector (SOX) is trading weaker than the S&P 500 total. As SOX is seen as a leading indicator for the broader economy (semiconductors are used everywhere), this is a negative for the broader market.

And we are seeing more and more signs that the market is under stress. The VIX is perhaps the easiest way to show this. The VIX measures the market’s price for volatility over the next 30 days.

MOVE measures volatility in the interest rate market in the same way that the VIX measures volatility in the equity market. Even as the VIX has fallen (and is now testing higher), the MOVE has remained at a high level. This is a good excuse for the market to be nervous. The bond market is at least three times the size of the stock market. And because the bond market is almost 100% run by professionals (no retail for example), the bond market usually gets it right and is a leading indicator for the stock market.

The 10-year US Treasury yield has been trending slightly higher in recent days. This is a signal that the market is positioning itself for higher risk. Let us see how this develops.

The Nasdaq (QQQ) is still in a long-term uptrend, but this is about to be tested.

The same goes for the S&P 500, which has also formed a double top. Let us see how this plays out.

Historically seasonality seems to be playing itself out, with September being the weakest month of the year.

But with tech and big cap being sold off, it is also a flight to safety. Brewers, telecoms, distillers & winemakers, household nondurables, beverages and tobacco were all up 1.5% or more in the US yesterday. XLP is a staple and there is a tendency for a parabolic rally here…

The US Brewers Index rose 5 percent yesterday in flight to safety.

Let’s see how this all plays out. There are plenty of winning trades to cash in and as fear spreads in the market, it may create new energy on the downside. For those of us who are long positive, the best strategy is to stay frosty and take it one day at a time.

Happy trading!

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