The weekly market reports include a market position update, a stock market forecast, and an analysis of capital markets. To access the full report, you must subscribe to Premium Articles, Weekly Premium Articles, or an All-in-One subscription.
Included in this report:
- Weekly summary.
- Update on market positioning.
- Stock market forecast.
- Capital markets update.
1. Weekly Summary (August 5–August 9, 2024)
- Stocks plummeted on Monday, August 5, 2024, due to a mix of rising economic and geopolitical risks stemming from US recession fears, a Bank of Japan rate hike that caused the liquidation of carry trades, and rising tensions in the Middle East and Eastern Europe.
- However, stocks rebounded as investors sought positive signs to buy the dip, which they found in the decline of initial jobless claims. Large-cap stocks (SPY) ended the week unchanged.
- Bonds initially rallied primarily due to a “flight to quality,” but then retreated. Long-duration bonds (TLT) fell 2.1% on the week.
- A rally in oil futures caused commodities (DBC) to gain 1.4%. For the week, crude oil futures gained 4.5%.
- Gold (GLD) fell 1.3% on Monday but ended the week down 0.3%.
- The US dollar index (UUP) finished the week unchanged after a rebound following a test of support levels.
- Gold (GLD) has outperformed stocks (SPY) since January 3, 2022, with a return of 31.4% versus 16.5%, respectively.
- Since January 3, 2022, bonds (TLT) have been down 29.6%, while large-caps (SPY) have gained 16.5%.
- For the week, the equally weighted magnificent seven stocks fell 0.7%. All stocks fell except META, which surged 6.1%.
- The industrial sector (XLI) gained the most by 1.3%, while the materials sector (XLB) fell the most by 1.6%.
Year-to-date equity index and magnificent seven relative performance
Since the start of this year, the performance of the magnificent seven stocks (equally weighted) peaked on July 10, 2024, with a gain of 49.2% and has since plummeted to 26.7%. However, even after the correction, these stocks have provided support to the broader market indices. Specifically, year-to-date, the equally weighted S&P 500 and Nasdaq-100 total return indices are up 6.6% and 0.8%, respectively. In terms of the latter, it is nearly flat for the year, although the capitalization-weighted index total return is up 10.5%.
Overall, this has not been a great year for equities, but due to the impact of a few large-cap stocks, this is not reflected in total return indices. These facts have been known for a while, and the uncertainty about the future direction of the stock market is rising. In the event of a recession, the odds of a bear market have increased significantly. It is reasonable to anticipate a recession after several years of deficit-spending-driven growth. The question is how deep the recession will be. Neither technical nor fundamental analysis can answer this important question because the outcomes depend on future developments and reflexivity.
Implied and realized volatility
On a closing basis, implied volatility (VIX) spiked to 38.6% but then reverted towards the long-term mean of 19.5% to end the week at 20.4%. The S&P 500 Index’s realized 21-day volatility rose to 20.6%. Note that the implied volatility reached higher levels than in 2022, whereas this is not the case for the realized volatility, as fear and greed have a higher impact on the former. Note that intraday on Monday, August 5, 2024, VIX surged to 65.7%.
Implied volatility tends to occur in clusters, but this is not always necessary. However, due to historical clustering behavior, risks in the stock market remain elevated, and investors may continue to rebalance their portfolios next week. Rebalancing can take many forms, from increasing allocations to low-volatility stocks to reducing allocations significantly. No one can forecast the actions of market participants with high statistical confidence, and as a result, adjusting portfolio risk exposures is more important than any technical or macroeconomic forecasts.
2. Update on market positioning
We use two cross-sectional momentum long-only strategies for capital markets and factor ETFs. Year-to-date, both strategies outperform the S&P 500 total return by a wide margin.
Last update: Friday, August 9, 2024, after the market close.
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Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. All charts in this report are for informational purposes only. See the disclaimer for more information.
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Charting and backtesting program: Amibroker. Data provider: Norgate Data
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