Monday Takeaways: Misplaced Optimism Could Be Costly

Shah Gilani|August 12, 2024

There’s optimism in the air…

But the dust hasn’t settled from last week correction.

We need to proceed with caution…

Because we could still feel some aftershocks.

There are a few things to watch out for before you start buying again.

Get all the details in your Monday Takeaways.

Click on the thumbnail below to watch.

Transcript

Hey, everybody. Shah Gilani here with your Monday Takeaways. The market has opened, and it is trying to work its way higher. There’s some optimism in the air.

But your first takeaway is from what happened last week. Yes. The big dust-up. Yes. The markets ended up looking like they wanted to make a comeback, but the takeaway from that takeaway is they’re not back.

We are still way off of our recent highs. None of the major stocks, none of the Magnificent Seven stocks, other than Meta, really looks pretty decent.

Nvidia is trying, but it’s not yet made a comeback. And looking at Microsoft or Amazon, for example, two giants, they’re both not looking so good.

So the leadership stocks that have led the market are not bouncing the way we would like to see in terms of the technicals and looking like we’re going to break out some resistance here and move forward. They haven’t done that yet.

Takeaway from there is as much as I want the market to go higher, as much as I want to buy this dip – and I am nibbling a little bit here and there – I’m just not 100% convinced.

Takeaway of takeaways there, be careful out there. If you’re going to buy this dip, use tight stops because we can reverse.

Wednesday, we have CPI again. Now, the expectations are for a 0.2% rise in core. Now that comports to about 2.4%, which is pretty much in line, 2.6%, depending on the numbers. I’m going with a general economist consensus of 0.2%. So that equates to an annualized 2.4%.

That’s pretty close to the Fed’s target. And I think if we get there, markets are going to want to try to rally. But investors, again, are nervous.

How nervous are they?

Just look at the S&P options that expire on Wednesday. These are zero date expiration (0DTE) options that have gone out a couple days, but the options that I’m looking at that expire on Wednesday for the S&P 500 show a 1.2% possible move up or down.

That’s how much volatility is being priced into Wednesday’s expiration options. And what that tells me is traders are positioning themselves for a big move one way or the other.

Now, volatility goes both ways. When you look at the VIX, for example, and it’s got a 24-handle on it, that means it could move 24% in the next year up or down.

Those are huge moves. So when we saw the VIX up at 65 the other day, it was frightening. But volatility goes both ways. So the measure of volatility, including the VIX, and in terms of the 0DTE options I’m talking about for Wednesday, show about 1.2% probable move one way or the other.

Now, if CPI comes in below expectations at 0.1% or something great, then I think that 1.2% move will probably be to the upside. It may not be a 1% or 1.5% move, but it’s probably going to be a decent-sized move to the upside. Now, if core unexpectedly comes in significantly higher, then we’re going to see a pretty ugly downside move.

Could it be 1.2% to the downside? Easily, given how nervous markets are right now. So Wednesday is a big deal. The CPI number is a big deal.

Thursday, we have unemployment claims. Now, the Fed has clearly indicated they are now taking both parts of their mandate equally and applying equal weight to them in terms of policy. That means, yes, prices, i.e. inflation, we’re watching that. And the other mandate they have is full employment.

And they told us they’re watching the labor market intensely because if labor starts to slip, if the unemployment rate starts to rise, that’s half of their mandate.

Okay? Full employment. That means they’re going to maybe cut because they think that the economy is going the wrong way and employment is going the wrong way. And so that’s the other half of their dual mandate.

So Wednesday is a big deal because of CPI. But Thursday, the way markets have been reacting to anything having to do with labor, unemployment numbers, of course, initial jobless claims, and ongoing jobless claims, these are key data points for investors and traders to look at because they are now key for the Fed. So Thursday’s going to be another interesting day.

General takeaway here is I don’t think we’re out of the woods. I want to believe that this is a great buy the dip moment. Maybe some of you did. Good on you if you did. You’re in the right direction, so far so good.

But be safe out there because the worst may not be over, but I’m hoping it is.

Catch you guys next week. Cheers.