The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
The beginning of ugly.
Futures started to slip at 4 AM, when Europe opened for trading. Value leaked out of futures until the open and the S&P 500 began the day -75 points. The market bounced around before trading lower. The index spent the bulk of the session off more than 2%. Weakness spurred on more weakness and bounces, if you can call them that, were brief and small. The late afternoon saw even lower lows but we squeezed off the lowest levels in the final hour.
Information technology led the decline and was the worst performing sector for the day. Yields dropped again and Fed Funds are pricing 83 bips of cuts for the year. Capital flow was higher, but not extreme, 141%. It climbed over the course of the day, a sign that investors became more active as losses grew.
Headlines and macro data weren’t culprits today. The fundamental investing landscape is about the same as it was Friday. What’s different is sentiment. The market is taking recession risk seriously. Maybe you could even start to see a preparation for a recession in equity prices. This is not to say that a recession is coming. The market doesn’t have a recession meter that we can look at. It does appear that equity market sentiment is thinking about clouds on the horizon. This is a large shift from a month ago, when it was nothing but blue skies from now on.
The current state of the market is precarious. If a recession is likely to occur, we’re going down much further. If the market simply believes that there’s a material probability of recession, say 25-ish percent, and that growth is getting shaved in the moment, we may be near the end of the correction.
I don’t know what the reality is. Nobody does. However as things get sloppy, there is a risk that sentiment overreacts along the way.
This doesn’t have to mean we get an excessive selloff. It could also mean we get an excessive bounce. Emotions are driving the ship right now and when the market recovers from a bit of hysteria, it is prone to embrace hyper-optimism.
Throw in the fact that the 200-day moving average (5735) broke badly today and you have an emotional market that is ready, willing, and able to move 2-plus percent per session for a while.
See you tomorrow.
-Mike
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