The August slump in the US stock market rally in 2023 wasn’t much of a surprise, with even some of Wall Street’s biggest bulls arguing there was room for some consolidation.
August tends to be a rocky month, as VIX volatility often peaks for the year. You can also put up with low volume trading conditions more often, especially in the latter half of the month, as the holiday season sees the end of last summer.
But the 5.6% drop for the S&P 500 SPX over the 15 trading sessions through Thursday was about as bad as it has been in August, Fundstrat’s Tom Lee noted in a note Friday morning. However, Lee, a Wall Street bull, confirms that the pullback is more likely to be a “it’s August” phenomenon.
“We see stocks selling for well-known and logical reasons,” he said.
These include a 50 basis point jump in the 10-year Treasury yield, which pushed the price to a 15-year high this week, a rally in the US dollar and a long-awaited jump in the Cboe’s volatility index.
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On Friday, the S&P 500 and Nasdaq Composite COMP were headed for their third straight weekly loss, while the DJIA Dow Jones Industrial Average was heading for a weekly decline of 2.2%.
So what would it take to turn the slide into a dangerous trajectory, which Lee identified as a 10% pullback to the 4150 level of the S&P 500?
An increase in yields “must threaten” to break something, “otherwise an additional external shock will be required,” Lee said.
“I’m not saying this can’t happen. For example, if oil rises another 10% and signs of wage pressures rise, this could turn into a larger sell-off. Why? It will make investors wonder if inflation is on the way down,” Lee wrote. down.
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The inflation story is receding for the time being, and investors are focusing on rising bond yields weighing on price-to-earnings ratios, and signs of a strengthening US economy raising the risk of a Fed rate hike, Lee said. He said China’s weak economic data and real estate problems are also a concern, at least on the sidelines, for US investors.
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But Lee argued that the market is providing signs that stability may return soon.
For example, while the speed of the rise in the 10-year yield hurt stocks, such jumps often occur near the end of the stock selling cycle, he said. He noted that the 50 basis points, or half a percentage point, jump in the 10-year Treasury yield seen over a 21-day period reflected the jumps in yields that ended Sept. 1. March 23 and 2 last year. In those cases, stocks jumped to bottom after 8 to 16 days.
Second, stocks are technically oversold, with a metric known as the McClellan Oscillator dropping to -50. Lee said this has only happened 39 times since 1990 and 51% of the time, stocks fall within five days, and 72% of the time they fall within 15 days.
With this time frame in mind, he showed me several dates that could be important as to the next move for the markets, including August 4th. 24, the morning after Nvidia Corp.’s chip manufacture. NVDA
announces second quarter results. Nvidia’s blowout this spring has been credited with sparking an artificial intelligence craze that sent stocks of the tech giants soaring.
Investors are due to take notice on Friday, August 3. It’s September 25th, when Federal Reserve Chairman Jerome Powell is scheduled to deliver a speech at the Kansas City Federal Reserve’s annual symposium in Jackson Hole, Wyoming.
Lee recalls that Powell’s Jackson Hole speech last year marked the top of a bounce for the S&P 500, after which shares fell 19% over the next eight weeks.
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