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OVERSOLD MARKETS, BUT AUGUST LOWS HISTORICALLY RARE… BE PATIENT

by Fortem Financial August 6, 2024

There are certainly pockets of the market more deeply oversold than others after the last few days, but on balance, we’d still stop short of calling this enough of a rinse to really lean into yet. It might be an easier call if it was October, but we frankly struggle to think of many markets that have put in their corrective lows in early August. Here’s a summary of our current thinking, but reach out with questions or requests—we’re available to help in any way.

 

  • On a scale of 1 to 10, with 10 being deeply oversold… we’d put this market in the 6 or 7 zone. Some pockets are certainly more rinsed than others, and likely enough for near-term relief, but on balance would stop short of saying we’re ready to aggressively lean in.
  • Part of this consideration is simply the calendar… we can’t think of many market lows found in early-August (Aug. ’82 the only real example). September or October … sure … but August is an unusual month to put a low in. Be patient for now.
  • To the extent LTCM is a reasonable comp, or at least one to be familiar with, the panic low was in August, but the final low came in October. We’ve always called this the “bang” followed by the “whimper.” We highlight additional historical examples in the pages ahead.
  • There was certainly high emotion in the price action yesterday – between the VIX surge, another sizeable spike in put/call ratios, and a surge from inverse ETF volume. These are all notable, but can be early… proximity vs. precision.
  • The % of the S&P trading to a 20-day low hit 43% yesterday and the % of issues above the 50-day is at 44% - also shy of a deeply flushed market.
  • Initial bounces will be met with resistance between 5300 and 5450 in the cash market – a wide range to be sure, but it also reflects the velocity of the 3- day decline.
  • 10-year yields held support yesterday, and the 2-year yield actually closed higher. We’ve been bullish bonds all year, but yields have now done a lot in a short period of time… let them breathe here. Resistance on 10s is in the 4.10% to 4.20% zone.
  • Similar thinking on Yen… reasonable for USDJPY to rally in near-term, but resistance into the 200-day will be formidable, particularly given the break of a multi-year trend line over recent days.
  • Defensives and yield proxies, not surprisingly, have been the leaders over recent days… among them, it’s the Utes and REITs with the best trends, along with some life developing in Healthcare.
  • The relative resiliency from the REITs is interesting… to the extent that CRE is still viewed as the big consensus problem in “the next downturn,” why isn’t the sector acting like it?
  • Longer-term perspective remains important here – entered this correction with most stocks in uptrends, but leadership and rates taking on a mid-cycle identity. Unusual to get major tops from this setup, or at a minimum, it would be beginning of any topping process.
  • Important for Financials to respond sooner than later, and as a leader. The sector was in a strong position going into this, key for it to retain leadership credentials.
  • Discretionary vs. Staples (equal-weight) has now undercut its YTD low – key tell on what the market thinks of the economy ahead. It’s oversold and we’d look for it to bounce, but what does it start to imply about 2025 if it can’t resume the uptrend?
  • $96 has been the level we’ve been eyeing on NVDA, and it filled its gap there yesterday, trading as low as $90… that’s a -35% shake out over 31 trading days. It may test those lows again as Semi seasonality is weak through September, but it’s likely in the ballpark of support.

 

Sincerely,

Fortem Financial
(760) 206-8500
team@fortemfin.com

 

 

Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

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