Markets In Panic Mode
It looks like we are finally getting the washout in tech stocks, small caps, commodities, and especially crypto, that we have been talking about for much of this year.
Among other reasons that are keeping us from getting too bullish right here right now are thoughts like this – the S&P 500 just got to that 5000 level but a few months ago and since it blew right past that level and kept running higher, even today's big sell off coming on top of last week's big sell off has the S&P 500 back to.... 5150 (great album by Van Halen, by the way...and also code for California law code for the temporary, involuntary psychiatric commitment of individuals who present a danger to themselves which is why VH named their album that).
That said, it looks like we are finally getting the washout in tech stocks, small caps, commodities, and especially crypto, that we have been talking about for much of this year. We have been saying for awhile, something along these lines "we love our favorite longs, but we remain cautious with respect to the broader markets"?
There is no one single reason that the market is crashing (is there ever?), but the big news over the weekend is the unwinding of the "carry trade" in Japan. The Japanese central bankers (in their great wisdom), kept their interest rates at near 0% all of the last two years while every other central bank (in their great wisdom) jacked rates up 400-500bps. Because of this wide discrepancy in rates, it opened the door for traders to borrow money on the cheap in Japan (via shorting the bonds), and then loaning that money out in the US, Europe, and elsewhere (via buying bonds).
Given the greed we have seen of late, it wouldn't shock us if some funds were buying tech stocks and small caps with the Japanese money, despite how risky and outright reckless that was. Anyways, the artificially low rates caused the Yen to start collapsing against most other mainstream currencies so last week the Japanese central bank raise rates for the first time to save the currency. With the Japanese rates on the rise, and the Yen strengthening somewhat, the carry trade starts to become unprofitable quickly. The Japanese stock market sank 12%(!) last night.
We're not sure that this sell-off is done quite yet, but with the market this panicky into the open we are buying a tiny bit of (in no particular order) Robinhood (HOOD), Nvidia (NVDA), Qualcomm (QCOM), Meta (Meta), and Taiwan Semi (TSM).
Don't go crazy – we are certainly not drawing any lines in the sand here. We think there is a chance that the open is ugly and then markets show strength mid-day, before selling off again into the close. There is now unanimous consensus that the Fed should cut ASAP and we wouldn't be surprised if the Fed has some sort of emergency meeting to cut rates and/or start injecting outright liquidity into the market. If they actually do that, the markets will likely pop in the short run and we would move to closer to outright bearish, as we mentioned in our Fed Playbook article last week.
Stay safe out there!
PS. I was on the road last week seeing specialists in Texas because we'd had some potentially worrisome findings in a recent doctor visit. After being gone for four long days of tests and PET scans and MRIs and what not, the doctors determined that I am fine. And I'm sorry that I wasn't here to send out some notes to our dear Trading With Cody community while the markets were doing what they have started doing. I'm back and am indeed healthy and will be here all this week with no plans of travel until I take Bryce and my wife and Lyncoln to NYC later this month.
You can expect to see a note or two from Bryce and me if/when the markets do this crazy stuff this week.
