August 6th Market Overview

Happy Tuesday everyone!

Big green bounce today, finally some relief from the red. I knew it was coming but didn’t expect such a big bounce on some of these names. Volatility remains high yet the VIX is declining on this bounce in kangaroo land. Im adding a closing thoughts section to today’s letter at bottom.

Lets dig in…

Executive Summary

• U.S. stocks rebounded sharply, with the S&P 500 up near 2%, recovering from Monday’s steep sell-off.

• All 11 S&P 500 sectors traded positively, with tech and real estate leading gains.

• Japanese stocks surged, with the Nikkei 225 posting its best day since October 2008, up 10.2%.

• The yen carry trade unwind continues to impact market volatility, but showed signs of stabilizing.

Market Overview

We witnessed a significant rebound in U.S. stocks today, as trade volume took a breather from recession fears. The S&P 500 rose 2%, the Dow Jones Industrial Average gained 556 points (1.4%), and the Nasdaq Composite climbed 2.2%. This recovery comes after Monday’s sharp sell-off, which saw the Dow drop over 1,000 points. All 11 sectors of the S&P 500 traded positively, with technology stocks leading the charge, up nearly 2%.

Key Market Drivers

1. Pause in recession fears: Investors reassessed economic concerns, leading to a broad market rally.

2. Japanese equities surge: The Nikkei 225 posted its best day since October 2008, soaring 10.2%, boosting global sentiment.

3. Tech rebound: Megacap tech stocks recovered strongly, with Nvidia and Meta Platforms leading gains.

4. Yen carry trade: The ongoing unwinding continues to impact market volatility, but showed signs of stabilizing.

5. VIX decline: As the VIX came down, volatility funds reduced equity selling, increasing market liquidity.

Stock Spotlight

1. Nvidia (NVDA): Shares surged 6% as tech stocks rebounded and market makers worked to keep the stock above $90.

2. Meta Platforms (META): Advanced more than 5%, recovering from Monday’s 2.5% decline.

3. Lumen Technologies (LUMN): Skyrocketed 88% after announcing $5 billion in new AI-driven business.

4. Kenvue (KVUE): Jumped 12% following strong Q2 earnings and revenue beat.

5. Palantir Technologies (PLTR): Rallied nearly 12% after raising its full-year revenue forecast to $2.742-$2.750 billion.

Other Magnificent 7 Updates

• Apple (AAPL): Recovered some losses as market makers worked to keep the stock above $200.

• Microsoft (MSFT): Participated in the broader tech rebound, benefiting from increased market liquidity.

• Amazon (AMZN): Showed positive movement amid market recovery and tech sector strength.

• Alphabet (GOOGL): Gained ground following Monday’s sell-off, in line with other tech giants.

• Tesla (TSLA): Joined the upward trend in tech stocks, reversing some of Monday’s losses.

Other Notable Company News

• Uber (UBER): Shares popped 6% premarket after beating Q2 earnings expectations with EPS of $0.47 vs $0.31 expected.

• Caterpillar (CAT): Rose over 4% following better-than-expected quarterly results, with EPS of $5.99 vs $5.54 expected.

• Yum China (YUMC): Surged 8% after Q2 earnings beat and announcement of CFO stepping down.

• Super Micro Computer (SMCI): Experienced a strong rally yesterday, but positioning remains bearish heading into earnings.

Sector Watch

Bond Market

While no specific bond market updates today, it’s worth noting that credit default swaps haven’t risen as dramatically as the VIX, suggesting that the panic in equities may be more pronounced than systemic risk to credit markets.

Policy Watch

Market is closely watching for any signs of potential emergency rate cuts, which some speculate could occur given recent market volatility. However, such cuts may signal panic and potentially worsen carry trade issues by weakening the USD.

Closing thoughts

We’re seeing a strong reversal today, but markets may remain under pressure until the August monthly options expiration (OPEX events this will start next week). The VIX remains elevated, indicating continued volatility. Positioning data suggests a bearish sentiment persists, with significant put options expiring in August. Once this OPEX passes, we could see a more sustained move higher, particularly after September’s OPEX exp events.

The unwinding of the yen carry trade continues to be important, with Morgan Stanley estimating at least $90 billion more to unwind over the next four sessions. This could maintain pressure on markets in the near term.

Investors should keep a close eye on the VIX, USDJPY relationship, and upcoming U.S. economic data releases. The 490-500 range on the SPY could present a strong buying opportunity if reached in the coming days but its too early to signal anything but volatility.

P.S. Any “clicks” to our sponsor allows me to drink good coffee in the morning. Please consider clicking through and checking out sponsors even if you don’t think you want to buy or subscribe from them :-)

- JB

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