The Goldilocks Scenario
Just when I thought that the market was bottoming out from its drop – kaboom! Some bad news, and it drops again. Make no mistake – this is a market looking for bad news, and the last month has brought plenty of that.
Non-Farm Payrolls
On Thursday, things seemed to be stabilizing. After the 4.7% SPY drop (9% for QQQ) things seemed to be consolidating – then Friday brought the non-farm payroll figures. Well below estimates, it really shook the market.
A figure of 175,000 was expected – the actual was 114,000. So investors went from worrying that is the number was too high the Fed wouldn’t cut interest rates, to now worrying that with the number so low we are heading into a recession.
The Goldilocks Scenario
The goldilocks scenario is when economic conditions are neither too hot to cause inflation nor too cold to trigger a recession, creating an environment that is just right for stable growth and rising stock prices. Clearly, we went straight from too hot to too cold very quickly!
The Dangers of ChatGPT
It can’t count. Incredible, but true. Chat GPT can’t count.
After 8 iterations with my pointing out that there were only 2 bears in the doorway and I wanted three, ChatGPT insisted there were three. I gave up.
ChatGPT was convinced there were three, and told me so!
Take everything it says as a guide, not the truth.
The Elephant in the Room . .
. . is, of course, the upcoming election. Everyone thought they had a handle on it (a Biden / Trump rematch) and the general consensus seemed to be that Trump would win, and that the economy would again flourish. Now with Biden’s departure, we have a different scenario, much harder to predict. Right now Harris is in the honeymoon period, has the lead in some polls, and is known to be more left than Biden which will be bad for the economy. Many people seem inclined to vote for her because she is a woman, and not white, so goodness knows how this will all play out, and markets don’t like uncertainty.
I do not wish this blog to become a political diatribe, so other than acknowledging that the situation has become unstable and unpredictable and will affect the market, I will leave it there.
To the Markets
There is less data out this week, with initial jobless claims out on Thursday. Let’s look at the charts:
SPY Charts
You can see that the support line at 538 was holding and it looked as though SPY was starting to move up again – then dropped right through on Friday. Very disappointing, I thought that the worst was over, but I was wrong. The next support level is 525, the previous high of March / April. It could be that Friday’s candle was just an orphan, and it will move up again. As always, we have to watch and see where the market takes us. We are still some way off a death cross, so no action is required right now.
On the weekly chart you can see that it has dropped right down and is resting on the red trend line I drew in last week, starting at our trade in October last year. The longer green trend line is sitting at 520, let’s hope that SPY doesn’t feel obliged to go down to that.
SPYG Charts
SPYG is similar to SPY. It looked as though support at 76 was holding, and then on Friday it fell right through. It created a doji candlestick, which was interesting. In itself, it is not significant, but if the next 2 trading days are up then it likely shows the bottom of a downtrend. Let’s hope so.
On the weekly chart we can see that it has pierced the uptrend, and is heading down towards support at the high of 2021.
QQQ Charts
QQQ has had a bigger drop than SPY (10.8% V 5.7%). In fact Friday’s drop brings it right into correction territory. Will it progress to a bear market? Too early to tell. Remember that all bear markets start with a correction, but not all corrections turn into bear markets. Support at the March / April highs is still holding.
The weekly chart is not very cheering. QQQ is resting on the uptrend line. Let’s hope that it holds.
VIXY Chart
The VIX has popped up a little earlier than expected, and is now at a level it hasn’t been since early 2023. High volatility – as if we didn’t know!
ITMeter
Currently, the bull is in force, but the increased volatility is making us very twitchy!
The week ahead
As I mentioned, not an enormous lot of news this week, with only heavyweight tech stock reporting being Super Micro Computer. Maybe I should give up crossing my fingers for a good week. It doesn’t seem to be working!
Futures
Well! Disaster everywhere. I wrote this blog post yesterday (Sunday) when things didn’t look too bad, and am still reeling from the news today. Its ugly. The situationwith Iran, all stock markets reacting to Friday’s Non farm payrolls indicating a recession, no good news anywhere.
The futures look awful, the worst I have ever seen:
I would love to be able to peer into the future and give words of comfort, but I can’t. I am just as much in the dark as anyone. However, if the futures are any guide to what is happening this week we should be preparing to get out of the market as a death cross may be coming.
It is unfortunate that I am flying today, then again Wednesday & Thursday (and hoping that Qatar Airways diverts to a safer route) so I won’t be able to keep tabs on things and post. So watch for the death cross, remember to wait until it is confirmed then get out of your positions. I will post here if I can. Why does everything happen when I am travelling??
(Heather Monday 9:30 Italy time.)
And my last week away
This time next week I will be back in WA. I always hate the end of holidays but seeing how crowded even quite off-the-beaten-track places are makes me think it is time to go home. Being from WA I am used to the summer heat, but there is it a dry heat. Here, on the islands around the Mediterranean while the actual temperatures are the same as I am used to, it has been very humid which I find quite uncomfortable.
And the good thing? No more working on a laptop! Back to my desk and big screens!
And just to show that it wasn’t all Roman ruins, beaches and sunsets – I had some kulcha too! (Carmen, ballet, Teatro Massimo, Palermo)
Fingers crossed for a good week (actually I would settle for an OK week!)
Heather
7 Responses
Hi, Heather!
In the past, you have alluded that you have both ITM and individual shares. I’m wondering if you would be willing to share a rough breakdown of your portfolio allocation between ITM and other investments? Not amounts, of course, but maybe approximate percentages? Thanks for your consideration!
Eric
Hi Eric
I don’t do individual shares (well, practically never – I flutter from time to time and I always get my come-uppance – this is the position as of today of some AMZN I bought on a whim: AMZN 11/15/2024 200. Cost: $2,351 Market value: $569. The market teaches me a lesson every time!)
I really stick to SPY and QQQ, some shares, some ITM and a small percentage (<5%) half each ATM and OTM. Until yesterday it was 80% ITM strategy & 15% shares, but last night I moved some more to shares as I wanted to reduce exposure to volatility. I explain that in the bull book Ch 11 in the section 'Sleeping at night'.
Hope this helps.
h
This is very helpful, thank you!!
Wow what a start to the week!
I concur with your warning of caution and to keep an eye for a death cross, I would be surprised to see one this week. The 10 is still far away from the 200 so unless the market absolutely craters, it will be sometime after this week(who knows when).
One thing is for sure, for me at least, I am handling this crash/correction much better mentally than the Covid crash when I didn’t have much of a plan.
I’m thankful for your book as it gave me a good framework to work out of. Also knowing it’s historical performance through the thick and thin of different market turmoils of the past.
In some ways I’m excited to see this breakdown because for the first time I’ll get to see how this plays out in real time, not just how it was in the rear view mirror.
It may be ugly, but I at least have a rock of reason to brace myself on.
Stay safe out there!
Hi Allan,
yes it was unlikely that we were going to see a death cross last week, but as I was going to be unable to do anything on the blog or by email (travelling and flights) I wanted to alert people that they had to look out for themselves – just in case.
Y&es, it is good t have a framework / strategy. You know that if you follow it you are going to be spared the worst of any big downturns and that it wins big time in the long run. That doesn’t make any downturns more pleasant – but they ae part of a traders life so we have to be able to handle them without going completely insane!
Ad since the low of 6th August things have started to look better (tempting fate here!)
h
It’s gone from a trending to a ranging stock market… the unusual top configuration – was maybe the ( top for awhile ) until she starts trending again. I’m sure you know how to protect your position…
( as an optioneer – no pun intended ).
That’s what ( in my humble opinion ) I think your next book should be…
Randy
Hi Randy, when you wrote this the market was just about to do the big Monday 6th drop (yes, I am way behind on replying to comments) since then it has recovered. Re protecting your position – I have a bigger than usual percentage in straight SPY / QQQ stocks simply ecause I am twitchy about what is happening politics-wise. As I recommended in the book – remove some leverage when you wouldn’t be able to deal with the possible losses. But – am in no way any sort of expert at this . . . so couldn’t possibly write a book on this subject with any authority!
h