To The Moon

The S&P 500 and Nasdaq 100 returned -4.22% and -5.86%, respectively, last week. Major market movers included PG (+2.36%), Pepsi (+3.36%), AT&T (+5.38%), UnitedHealth (+1.13%), American Tower (+5.4%), Mondelez (+4.87%), Visa (+1.09%), Nvidia (-13.86%), Apple (-3.57%), Microsoft (-3.7%), Broadcom (-15.86%), Alphabet (-7.63%), and Amazon (-3.98%). Key earnings reports this week include Oracle on Monday and Adobe on Thursday. Important economic data releases this week include CPI on Wednesday, and Unemployment Claims and PPI on Thursday. Apple is scheduled to announce its iPhone 16 on 10 Sep at 1:00 AM (Singapore time). The US presidential debate between Kamala Harris and Donald Trump is scheduled for 9:00 AM on 11 Sep (Singapore time). Things to Know Before Starting Your Week: 1) US presidential election uncertainty may lead to further drops in the US equity market. US stocks generally fall in September and October during election years, and typically start rallying in November and December. According to the US betting site PredictIt, the odds of Kamala Harris winning the US presidential election are 53%, while Donald Trump’s odds are at 50%, showing a tight race. However, other US betting sites indicate that Trump is the favorite to win the election. The Trump-Harris race remains very close. We reckon that investors dislike this election uncertainty and may continue to stay on the sidelines for the next 8 weeks, possibly waiting to allocate into the equity market after November 5th, the 2024 United States presidential election day. Source: Bloomberg, 7 Sep 2024 2) Investors Start Panicking Again – VIX Index Surged to 21 Wall Street’s famous ‘fear gauge,’ the VIX Index, surged to 21 on Friday. The VIX curve has inverted again since end August. The VIX spread now shows a negative reading, with VIX futures of longer maturities trading lower than those with shorter maturities, indicating that the S&P 500 is pricing in extreme near-term fear. I anticipate continued weakness in the equity market if the VIX spread continues to deepen its fall into negative territory. 3) Traders Betting on 4 Rate Cuts by 2024 is Simply Not Realistic Traders are now expecting Fed will deliver 100bp of rate cuts in 2024 and another 125bp of cuts in 2025, according to the CME FedWatch tool. I believe this massive rate cut expectation is unrealistic; probably only an economic hard landing scenario could justify such large rate cuts. Investors are getting ahead of themselves and will likely need to lower their expectations in the near future, which could lead to some market correction. There’s a possibility that the Fed may only cut rates once in 2024 as a preventive measure, and then be done. Source: CME Fedwatch, 8 Sep 2024 4) Unwinding of Yen Carry Trade May Be Ongoing The continued appreciation of the Yen may signal the ongoing unwinding of the Yen carry trade. The USD/JPY pair has plunged below the August low of 144 and is now approaching 142. 5) Nasdaq-100’s August low may not hold The Nasdaq-100 recently reached an interim bottom at 17,867 on August 7th, followed by a V-shaped rebound. It subsequently fell 7%, closing at 18,421 on Friday, down from its recent peak of 19,824. Nasdaq-100 chart is forming a Head & Shoulders pattern. However, the risk-to-reward ratio of engaging in a short-term short trade may not be worth it, as classical reversal patterns like Head & Shoulders and Double Tops tend to fail on the Nasdaq-100 chart. I anticipate that bears may push the Nasdaq-100 lower than its August low, forming a Head & Shoulders pattern (with a neckline at 17,550), forcing bulls to exit their long positions in either September or October. Once election uncertainty clears on November 5th, I expect investors to begin building long positions again. 6) Last week’s selloff appears to be indiscriminate, suggesting further weakness ahead. Only the Consumer Staples and Real Estate sectors rose last week, while the remaining 9 sectors declined, with losses ranging from -0.5% to -7.47%. The recent selloff has lasted for four weeks (from the week of July 19th to August 9th). Investors should temper their bullish expectations, as additional declines could persist for several more weeks. Conclusion: Based on U.S. election year seasonality, U.S. stocks may decline in September and October, with a rally expected to begin in November and December. A tight election race, a smaller-than-expected Fed rate cut, and poor seasonality are likely the main factors that will drag down the S&P 500 and Nasdaq-100 in September and October. Some investors might consider reducing risk by purchasing protective puts or investing in inverse broad-based ETFs, such as inverse S&P 500 and inverse Nasdaq-100 ETFs (SH $ProShares Short S&P500(SH)$ , PSQ $ProShares Short QQQ(PSQ)$ , and SQQQ $ProShares UltraPro Short QQQ(SQQQ)$ ). I anticipate most AI-related stocks will break below their August lows during this correction. However, rate-cut beneficiary stocks should see their August lows hold. I still favor the "Magnificent Seven" stocks amidst volatility. The Mag 7 represents both a flight to safety and a flight to growth for investors. The potential declines in September and October will provide accumulation opportunities for long-term investors.