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Markets rally as recession fears ease: Take action or stay patient?
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Markets Are Bleeding Red. What Next?

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Trader’s Edge joined discussion · Aug 5 04:11
Markets Are Bleeding Red. What Next?
Market Meltdown - What got us here?
Initial Cracks
Cracks in the markets were already showing 2 weeks back on the week of 23rd July. The catalyst that kicked off this meltdown started with two major stocks, Alphabet ( $Alphabet-A (GOOGL.US)$) and $United Parcel Service (UPS.US)$. Alphabet announced its earnings and even though it beat expectations, the performance was nowhere near stellar compared to the previous quarter. This was taken as a signal that perhaps tech mega-cap would not be able to live up to the hype and continually deliver outsized performance and we saw the intial outflow of capital from the tech sector to the small and mid-caps. The same day, UPS also announced that it missed its earnings and saw the stock price fall by more than 11%, the most since 2006. Traders took this as the 2nd sign that the economy was slowing and the markets saw more outflow on risk-off sentiment with traders rotating to safe-haven assets like the JPY.
The Meltdown
Markets took a pause on 26th July, Friday, to re-assess if the sell off was really warranted or just a knee-jerk reaction. At the same time, investors' attention turned to BoJ interest rate decision as the markets took a more cautious tone. Safe havens such as $Gold Futures(DEC4) (GCmain.US)$ and JPY continued to strengthen further. When time came for the BoJ interest rate decision, Governor Ueda, took advantage of the strong JPY and decided to do a surprise increase. The $OSE Nikkei 225 Futures(DEC4) (NK225main.JP)$ and $TOPIX (.TOPIX.JP)$ index sold off further upon the announcement. Quant-amental based funds with momentum driven models excerbated the move. Following the BoJ surprise announcement, the FOMC announced to keep US interest rates unchanged. The $USD (USDindex.FX)$ barely reacted to the announcement as traders already expected the first rate cut to come in Septemeber. However, the NFP numbers that followed on Friday showed the biggest drop and came in much lower than expected, showing that the labour market indeed was softening.
On the equities front, another tech counter, $Intel (INTC.US)$ also annouced extremely poor earnings and at the same time talked about laying off thousands of workers to improve profit margins. This added to the already weak markets and caused the continuation of the meltdown that we are now seeing across the globe.
Markets Are Bleeding Red. What Next?
What Can We Expect Next?
Market observers are expecting that the current market turmoil will cause the US Federal Reserve to make an emergency response by something this week. Traders are expecting this to take place as they are concerned that the US Fed has taken a little too long to cut rates and are now behind the curve without any form of sound monetary policy support for a US economy that earlier has shown signs of slowing down.
1. Watch the Yield Curve
As it stands, US treasury bonds have fallen sharply across the board as the markets are now pricing in aggressive cuts from the US Fed and we are looking at at least two 50bps cuts by the end of the year. Should this happen, we can expect the meltdown to continue further and will see a painful period of at least 2 years (if history is a good gauge). In the chart below, we see that the yield curve has just recently shaped a triangle breakout to the upside and is coming close to steepening above 0.00%.
(Note: This chart was shown recently by Chief Market Strategist, Isaac Lim's H2 market outlook during Moofest 2024.)
Markets Are Bleeding Red. What Next?
When this happens, the S&P index continues to sell-off for at least 2 years. The outlier included here is the very recent Covid pandemic, which sparked a quick meltdown and is followed by a v-shaped recovery in a matter of 4-5 months. Here, the yield curve never inverted below 0.00% and steepened back up.
Investors will have to continue to monitor the yield curve very closely especially now that we have a bullish triangle continuation pattern and at the same time coming dangerously close to crossing back above the 0.00%.
2. Fear is high, but is it really THAT high?
With the recent meltdown, the $CBOE Volatility S&P 500 Index (.VIX.US)$ (aka market fear index) rose as high as 38.02. The VIX has not reached this level since Jan 2021. So, yes, investors can expect to see higher volatility in the days ahead. This is not surprising as macro factors and sentiment can be very strong drivers when it comes to volatility and prices. However, as seen from the historical chart below, compared to the 2020 Covid Pandemic and 2008 Great Financial Crisis, the VIX is currently nowhere as near.
Markets Are Bleeding Red. What Next?
What Should Traders/Investors Do?
Given the above, and all that has been played out in the media, it is understandable for investors to be shaken seeing red all over their portfolio and stock holdings. Just as I highlighted during my H2 2024 outlook, one key theme for the rest of 2024 would be having to 'navigate a more VUCA market'. Investors are indeed now seeing the Volatile, Uncertain, Complex and Ambiguious environment that the markets are in.
Markets Are Bleeding Red. What Next?
In the military, it is all about scenario planning. Investors need to have a plan for the different scenarios that they will be facing in the markets. Let me break it down what should traders and investors should do going forward in the next few weeks:
A. Best Case Scenario - Markets stop bleeding and recover from here
Investors here have nothing to worry about and can just do the following:
- Hold on to your positions, sit tight and let the market recover.
- Stay with the long term trend.
- For those who believe in dollar-cost averaging (DCA), now would be the best time to go window shopping and look for good oppourtunities to buy into your high conviction holdings.
B. Worse Case Scenario - Markets continue the meltdown taking out all supports
Investors here will have to be willing to take the pain and push aside all personal bias. Remember, investing and trading are long term endeavours. The name of the game is to compound/conserve your funds.
- Take a good look at each position and try and understand your personal convictions for holding onto them.
- Are you holding for the long term or short term?
- Are you in it for capital appreciation or dividend play?
- For positions that are losing, are you alright with sitting on a much bigger loss than now?
- Learn to cut the losing positions. With such a strong downwards momentum, it is possible for the drop to keep dropping. By cutting the losers, you will be able to live to fight another day. It's you against the market. It's you against you.
- For the positions that are already profitable, learn to celebrate and reward yourself. Take profits. This part of compounding and securing your returns is just as important ans conserving your funds. Even the great investor Warren Buffett was recently reported selling off more of Berkshire's holdings of Apple shares. While the market's narrative of selling off Apple shares is seen as a negative event... Would someone as brilliant as Warren Buffett not sell of ALL his Apple holdings if he was not convinced of the fundamentals of the company?
- For the saavy investors, always stay hedged in times like this to reduce drawdowns and take advantage of the downwards push.
- Investors can buy put options on the stocks that they are already holding and earn a premium to take short-term advantage of the sell-off, while still holding onto the actual underlying.
- If investors are holding onto the underlying stocks and are still convinced in their long-term upwards potential but do not wish to increase exposure to single stocks, they can look at either:
- Buying inverse index etfs or,
- Buying puts on index options
I wish you all the best navigating such times. The markets will do what the markets always do, so remember to stay your course and keep your end goal in mind. May the profits be ever in your favour my friends!
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only. Read more
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