By Shah Gilani,Total Wealth Research, 2024-08-05
“Something's wrong.”
That's was my thought after the Fed all but promised a rate cut in September.
And sure enough, the markets tanked Thursday and Friday.
Market sentiment has shifted… for several reasons.
Today could be an ugly day… but there's a silver lining…
We'll soon be able to buy our favorite stocks at a discount.
So fasten your seatbelts… and get ready for a wild ride.
Tune in to your Monday Takeaways for what I see happening this week – especially in tech ETFs – as fear takes over the markets.
Click on the thumbnail below to watch.
Transcript
Sentiment Has Changed
Hey, everybody. Shah Gilani with your Monday Takeaways.
It's gonna be rough out there today, and I'm gonna tell you why. It's all about the takeaways from last week and the build-up to what happened last week. So number one takeaway is I believe and I've been saying this. I wrote about this on Friday, certainly talked about it a lot over the weekend with investors.
Sentiment has changed. It changed fairly quickly, and we saw that really on Wednesday. We had tech stocks coming down. The Nasdaq was nearing correction territory, but still, there was some buying going on, but not a lot. We saw some rotation into the small caps, into the Russell, for example, and that had a huge pop prior to that.
So people were like, “Oh, this is just part of a rotation.” What happened on Wednesday after the markets had dipped is we had a tremendous rally, and all of a sudden looked like, okay. This was a buy-the-dip moment, but the rally happened before the Federal Reserve statement and Jerome Powell's presser. So nothing happened afterwards.
The markets screamed higher on Wednesday. But then the Fed comes out and basically says, “Yeah. We're probably going to cut in September.” And wink wink. Markets did nothing. They didn't go any higher.
So it was already baked in. Close high looked really good. I said, “Something's wrong.” And, of course, Thursday and Friday happened. So the takeaway from the fact that a generally straightforward heads-up that the Fed's going to cut in September didn't do anything for the market.
The Economy
It had already been baked in. Then next takeaway really is it's about the economy all of a sudden. It's not bad news is good because if we have bad news on the economy, the Fed's going to cut, and that's gonna be good for markets. It's now bad news might be bad news.
And even if the Fed cuts, that bad news might mean a recession, and that might mean stocks are overpriced, and that's part of the sentiment change. So in a couple of days with some numbers Thursday and Friday, including the, you know, only 114,000 jobs being added on the week when it was estimated to be 179,000. The previous three months were all revised down.
So the job creation engine has slowed. Meantime, unemployment has gone from 4.1% to 4.3%. Investors are looking at it and the takeaway they get is, “Oh my. Are we heading into a soft landing, a recession, a hard recession?”
Has the Fed waited too long to start cutting? That's the quick sentiment change. Now as far as the economy goes, things aren't looking good. PMI numbers, a bunch of them are negative.
Manufacturing services negative in contraction territory. A bunch of other Dallas Fed numbers in contraction territory. So all of a sudden, the metrics show we are showing up as a “ruh-roh.” Things aren't going forward, and they aren't kind of level there.
Maybe going down. So, i.e., sentiment change. So that happens fairly quickly.
Dip Buying
So the takeaway from all that is investors didn't go out and buy the dips. That's how you know we've seen a sentiment change because Friday, there were dip buying opportunities in great names, and investors were having nothing of it. Here we got this morning. Pre-market is round about almost 8:30, nearing on 8:30 this morning as I'm recording this for you, and futures are down a lot.
Okay? So we're not open. We're more than an hour away from open, and everything is down pretty big. And by big, I mean, almost 5% in case of some indexes. Now the takeaway from the futures market being down this morning and the tech stocks having rolled over is this.
People who are in those names and in the ETFs that hold the big tech names, including the triple Q's, including SPY, and including all the other ETFs that were generated over the last several years to accommodate the Magnificent Seven stocks and the big tech names and the AI names and everything that investors wanted. ETF sponsors created those ETFs, and they got bought up. Now if investors who own those want to sell them and there aren't really a lot and equal amount of buyers, first of all, the price is gonna come down. But then the sponsors get those units back, and there's no need for those shares.
So their authorized participants, the market makers who manage their ETF books have to liquidate the ETFs. They have to dismantle them. They do that by selling the underlying stocks that make up the ETF. Now they're putting out sell orders to sell those stocks because they're destroying units.
It's called the creation process when you're creating ETFs, and you're destroying the ETFs when you're selling the underlines and wiping off the shares.
Institutional Selling
The problem there is the dealers that have this job see all these incoming orders to sell ETFs.
Now they know that if there aren't buyers, at the end of the day, there are fewer and fewer shares needed, they have to start liquidating the underlying stocks and dismantling those units and destroying the units.
They make a market in them. They make money trading them. So what they do, knowing that they're gonna get orders to liquidate, they sell the futures. They sell the futures down because when they get the orders in to liquidate the ETFs, so they gotta sell all the underlying.
By the time they go hit send to send the market orders down to sell all the underlying stocks in that particular ETF that maybe I'm responsible for, those stocks may be already lower. Now I'm selling market orders into a market where it's falling, and I'm gonna get lower prices when I'm filled. So that's my book. That's my P&L as a trader.
Now I don't wanna lose money as a trader, so I know that's coming. So I'm gonna short futures, a ton of futures, because as I'm liquidating and I'm selling the underlying, I'm helping push the price down of all those underlying stocks, which is helping pushing the ETF prices down. But if I shorted enough futures, I'm making money on my short futures positions. So I'm maybe net trying to stay even on the day.
So we're going to have a lot of institutional selling. A lot of this negative feedback loop is going on. The takeaway from that is this could be a historic day. Is it gonna be a buy-the-dip opportunity?
Looking Ahead
Yes. It is at some point, but I don't know about right now. Today is going to be one of those days you wanna watch and see if we start to see bids towards the end of the day. Yeah.
Pick up some of your favorite names. If they go lower later, you're gonna add to them. Don't I would not throw in all you have on a particular name today because you may get a chance to average down on that if this selling continues, and it certainly can, because we're gonna hit stops. We're gonna hit support levels.
And if we break those through the stops and those stop orders get hit, they're gonna be market orders to sell. Prices are gonna gap down further. If we hit support levels and the big indexes and we've already hit some of them, gone through them in the futures, people are gonna sell. They're gonna put more stop orders down.
So this could turn into a longer-term negative feedback loop. So am I gonna buy in here? Yeah. I'm looking for names to buy.
Am I gonna buy today? Not so sure yet. I wanna see how we trade out, but that's it. So the takeaway for today is be careful out there.
Alright? There's gonna be a time to buy when there's blood in the streets. There's gonna be blood in the streets today. Is it the be-all and end-all?
I don't know. But probably gonna be a good place to start looking for names on sale.
That's it for this week. I'll catch you guys next week. Be safe out there. Cheers.
The post <em>Monday Takeaways</em>: Sentiment Has Turned… Get Ready to Buy appeared first on Total Wealth Research.
