The recent asset price crash and the recovery that followed over the past week could lead to some complacency in trade selection. It could be a costly mistake. On a superficial level, it looks like the markets have just overcome a reasonably standard bump in the road. However, the different forces at play mean it’s easy to be torn apart to decide if this is the case.
The Kangaroo Market – How Did We Get Here?
The first is price action. Focusing on the major global stock indices, there is a difference in the graphical patterns between “classic” indices and those more focused on big tech. The Nasdaq and S&P 500 have seen more gradual price declines and rallies than larger indices such as the Dow Jones Industrial Average. The Nasdaq began its mini correction on Thursday July 15 when at one point it was down 1.71% on the day. That same Thursday, the DJIA was up 0.23%. An interesting price anomaly that reflects the additional volatility and uncertainty creeping into the markets.
On Friday morning, the DJIA started off positively and was up 0.43% intraday before noticing that it had missed the sign to reassess. The Dow Jones then caught up with the playbook and posted losses of 3.86% between Friday’s high and Monday’s low: a sharp drop in just two trading sessions and one that saw the DJIA crash. through the 20, 50 and 100 daily SMAs. The Nasdaq, on the other hand, has only crossed the 20 SMA and continues to trade above all else.
Cross references to the FTSE 100, which is chock full of underprivileged, energy and banking stocks, are helpful. Despite investors’ relief that prices rebounded on Tuesday, this index failed to climb above major moving averages.
Over the past seven days, the move has been a shift from cyclical actions to the perceived safety of big names in Covid-resistant tech. The shadow of the Covid still hangs over the markets.
This rotation from cyclicals to technology stocks is a defensive move and a sign of potential problems ahead. Buying on Amazon and Apple is no longer the action of speculative day traders, but rather a thoughtful allocation by institutional investment funds.
The Nasdaq ended lower on Thursday 16 thanks to investors in FAANG stocks and other big names in tech frightened by weekly data on US jobless claims, raising the odds of an inflationary spike and hence , higher interest rates. These risks remain.
Stagflation, one of the worst-case scenarios for the global economy, is coming more and more into conversation. Talk with CNBCJefferies CFO Aneta Markowska went so far as to say that “the market is trading on the topic of stagflation… There is the idea that these price increases will destroy demand, cause error. policy and ultimately slow growth ”.
The summer months are not usually associated with long-term trends being reshaped. Prices are supposed to drift until the Wall Street rainmakers come back from the beach. Things have been going upside down for the past 18 months, and an unusual major realignment appears to be taking place.
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