Assessing The Damage
The Markets
“There are decades where nothing happens, and there are weeks where decades happen.”
Two weeks ago, as stocks (SPY) were barely -2% off the highs, we noted a resurgence in volatility — VIX. After weeks of quiet, it started to rise, indicating concerns and anxiety bubbling up from below the surface.
Today, the VIX index reached 65.73 — a level not seen since the COVID-19 crash and the Global Financial Crisis before that. A historical move.
Monthly chart
The culprit?
Many are pointing to the Yen/Dollar relationship, also known as the Yen Carry Trade.
A carry trade consists of borrowing one currency at a lower interest rate and then converting it to another currency that is earning a higher rate. It’s an arbitrage trade. The trader then keeps the difference between the interest earned and the interest owed.
Free money, right?
Sure, except when it isn’t. No trade is truly devoid of risk.
In recent days, the Bank of Japan raised interest rates by 0.25% while many are speculating that the United States Federal Reserve could lower the Fed Funds Rate. Smaller moves may not seem like a big deal, but when these trades are heavily leveraged, the implications of even a small move can have magnified negative effects.
Futures contracts on the Japanese Nikkei are down as much as -21% over the last three days and nearly -28% from recent highs.
Let’s take a look at the effect on US stocks.
The Charts
SPY Last week’s noted bear flag has been confirmed, and the target was surpassed in two days. Now, the SP500 index ETF is in a tricky spot — below the March pivot highs but just above an ‘as of yet’ unfilled gap area between ~$505 and $508. The 200-day MA is down at $499.88.
It just missed ticking the ‘correction’ box this morning as the low of the day had it down -9.71% from the July high. RSI is nearly oversold at 30.71 and the price action has been swift, wide, and erratic.
That’s quite a bit of damage in a short time and will likely take some time to rebuild.
QQQ dipped below its 200-day MA this morning, down nearly 16% off the highs at that point. It did fill the gap from early may and then closed back above the 200-day MA.
IWM also dipped below its 200-day MA before recovering some, and it’s back to the same level we watched for months, $197-$202. There are two sizeable gaps above that will likely be focus areas on any move higher, along with the 50-day MA at $207.88.
DIA is in a similar predicament with the added pressure that it did not maintain its bounce into the close, instead closing near the day’s opening prices. This could go either way.
TLT jumped past another pivot level - $98.67.
DXY After noting the many layers of resistance around $104 several times, US Dollar Futures sold off sharply with stocks - a somewhat curious instance as lately there has been more of an inverse relationship between the two asset classes.
BTCUSD Bitcoin found some support near the confluence of the 61.8% Fibonacci retracement level and the AVWAP from the September ‘23 low. It is now below the consolidation range ahead of recent highs, possibly making the breakout move less likely. Being below all the key moving averages on this daily chart means it will be fighting an uphill battle in the shorter/medium term.
The Trade
Don’t be a hero.
If tactical, the increased volatility is producing some wide moves and good ‘cash flow’ trade opportunities.
If longer-term focused, don’t obsess over bottom picking. Moves of this magnitude are rarely resolved in one day. While V bottoms and sharp bounces do happen, finding a lasting price bottom is more commonly a process of days, weeks, or even months.
That said, previous comments from this section still apply. Have a shopping list. Know the attractive points for the timeframe. Set alerts and be ready to execute when the time is right. Consider taking partial position sizes to start, scaling in along the way.
And manage risk.
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The Disclosures
***This is NOT financial advice. This is NOT a recommendation to buy, sell, or trade any security. The content presented here is intended for educational purposes only.
Andrew Moss is an associated member of T3 Trading Group, LLC (“T3TG”), an SEC-registered broker/dealer and member of FINRA/SIPC. All trades placed by Mr. Moss are done through T3TG.
Statements in this article represent that person’s opinions only and do not necessarily reflect those of T3TG or any other person associated with T3TG.
Mr. Moss may hold an investment position (or may be contemplating holding an investment position) that is inconsistent with the information provided or the opinion being expressed. This may reflect the financial or other circumstances of the individual, or it may reflect some other consideration. Readers of this article should consider this when evaluating the information provided or the opinions being expressed.
All investments are subject to the risk of loss, which you should consider in making any investment decisions. Readers of this article should consult with their financial advisors, attorneys, accountants, or other qualified investors before making any investment decision.
POSITION DISCLOSURE
August 5, 2024, 4:00 PM
Long:
Short:
Options symbols are denoted as follows:
Ticker, Date, Call/Put, Strike Price
Example: VXX1218C30 = VXX 12/18 Call with a $30 strike
No buying for me today. Or selling ( I almost unloaded some of my long baba position early this morning) Glad I did not panic as it recovered throughout the day) Gonna access everything and tomorrow is another day. So thankful I found guys like you and Brian. Keep calm and manage risk 🙂
Great work Andrew. 👏🏼