Inside Markets — Getting Ahead

Yen strength in yesterday’s session drove concerns for a carry trade aftershock. The unwinding of the yen carry trade started after the 7/31 BOJ decision to raise rates and accelerated by a disappointing July US Jobs Report on 8/2. The unwinding led to increased bond market volatility that spilled into equity markets and drove disproportionate weakness in high multiple secular growth stocks. These high-multiple growth stocks aka Tech have rebounded from the 8/5 intraday low but have underperformed the broader market over that period. We expect this underperformance to continue in the near-term as positioning in Tech remains elevated and Fed rate cuts tend to make cyclical laggards more attractive.

Our near-term concern is that markets may ‘get ahead’ of a seasonally weak period that tends to start in mid-September. Recall that markets got ahead of the year-end rally in early November last year and ahead of the ‘January effect’ in mid-December. US corporate buybacks have been the largest source of demand this year with authorizations reaching a record of $893B. The open window for buybacks begins to close after September 13 with a gradual loss of demand reaching ~35% over the course of the ensuing ~2 weeks when other fund flows turn negative.

The Nasdaq 100 (NDX) is currently trading below its 50-day moving average that CTA’s often use as buy/sell triggers. The 50-day moving average for the SPX is ~5506 and a lower close could add incremental selling pressure. Volatility Targeting funds that became buyers when the VIX returned to subdued levels in mid-August are likely back on the sidelines with the VIX now trading back above 20.