Bad News Is Now, Well, Bad News – Markets Manic

On Friday, the employment report showed a gain of 114,000 new jobs in July. The unemployment rate rose to 4.3%, its highest level since October 2021. Both were weaker than expected. However, market reaction was a whole lot worse than those numbers would have indicated and that suggests more selling on Monday, perhaps even high magnitude selling. For all those crying for a rate cut, thinking it would just propel risk assets higher, bad economic news is now bad news for the markets. Those folks are dead wrong.

I have posited that unless the unemployment rate goes lower sooner than later, economic growth would likely slide towards the 0% level, bringing recession into a possibility. Below is the 10-Year Note yield which says it all about growth prospects. The last 5 days has seen a collapse in yields, meaning that investors are expecting much slower growth.

On July 10th I downgraded my 1-3 month view of the stock market, looking for a 4-7% pullback. That pullback came much sooner than I expected, but I have been hesitant to change my view because the decline did not seem over. Last week, after the huge Fed day rally was completely reversed on Thursday, I said that there should be more selling ahead. Friday certainly supported that view although the magnitude was definitely greater than I would have thought.

A few weeks ago, I wrote about the Volatility Index (VIX) and how it was not making new lows when stocks were making new highs. That was a concern that supported my pullback thesis. We now have the VIX spiking and it should get even higher early this week. That means stocks are getting closer to a bounce or a low.

Few are talking about the chart below which is the Japanese Yen. Throughout the massive rally in 2023 and the first half of 2024, the Yen made a string of lower highs and lower lows. Since the Yen bottomed early last month, stocks have struggled. That is not a coincidence.

Markets are in one of those manic periods now. They have sold off right from all-time highs which is not what is usually seen at the end of bull markets. This should be the meat of the decline with another rough day for the bulls on Monday. I have been talking about buying weakness and selling strength. The opportunity is quickly approaching.

On Friday we sold GDX, NUGT, SPLV, FDLO, FUTY, SSO, some NEM and some QQQ.