Inside Markets — Pain Trade

The last two weeks of August are characterized by low attendance, light volume and thin liquidity. These factors tend to generate greater single stock volatility that can impair the signal quality of market internals. In the near-term, we see the pain trade skewed to the upside as the record decline in equity volatility turns Vol Targeting strategies into buyers at a time when the corporate buyback window is wide open. The buyback window begins to close again in mid-September when seasonal weakness tends to kick in.

The Nasdaq 100 (NDX) has rallied past its post-payroll downside gap from 8/2 but remains >4% below its early July all-time high. That high was followed by what technicians call a bearish outside day. By contrast, the SPX is only ~70bp below its mid-July all-time high that was followed by a less ominous downside gap. Note that a Fed easing cycle usually enhances the relative appeal of cyclical and small cap stocks, which means the NDX could soon experience a period of relative underperformance.