Posted in
Big Picture
By: Tom Gentile
on August 2nd, 2024
Major U.S. Economic Reports Came Out This Week and Renewed Fears of a Recession
Wednesday, the FOMC met and made the decision to NOT raise interest rates. Every time I have pointed that out I follow that up with the fact it wasn’t a surprise.
Fed Chair Powell did say that their first interest rate cut in a number of years is ‘on the table’ as a possibility come September.
The markets, (which I will use the SPY as my representative of the markets), traded down from it’s all-time highs starting July 16. It got a bit of a pop higher on Fed Day; Wednesday July 31.
Then the Economic Reports Came Out Thursday and Friday Morning
Thursday the Initial Jobless claims came in higher than anticipated with 249k claims vs 236k expected.
The markets did NOT like that and sold off in a major way, with the Dow closing down 568.99-points from its open price and the NASDAQ closing down 452.88 from its open.
Today, the US Non-Farm Payrolls data came out and it came in with less job growth than was expected.
The number this morning was 114,000 for July. This is below the Dow Jones estimate for 185,000. The unemployment rate edged higher to 4.3%, its highest since October 2021.
Without belaboring this too much it comes down to speculation and talk resurfacing that the Fed may be too late with cutting rates and the US economy is at risk of going into a recession.
This led to the Dow trading down at or near 1,000 points today and appears to be closing down 600-points
Don’t Panic with the Drop in the Markets
Earlier in July I was looking at a rotation out of mega tech stocks and even lesser tech stocks and a rotation into smaller cap and housing stocks, but this data and the fears it has brought back to the markets is hitting almost all sectors now.
The key thing now is to breathe and understand if you are a long-term investor, these pullbacks aren’t unusual for August (July through October), and things should be fine over the long haul.
For shorter-term options traders, it can be a bit more of a concern, but I always educate you NOT to put all your eggs in one basket. Trade only that which you can afford to lose and still be mindful of your risk management plan you and your broker have in place ahead of time and stay true to your discipline.
Maybe scale back on the amount of trades or the size of risk per trade if you do anything at all. Again, discussion to be had with your broker.
The Financial Market Drop. Not so Bad? Or Bad with More to Come?
Here are two different technical time frame views on the SPY. It has the Fibonacci Retracement tool on each showing where the SPY is on these Fib levels on these time frames to show you a perspective on can make on either one.
I am showing these to you because you have to decide if this drop is or has set up a buying opportunity now for you or if it is prudent to wait.
The shorter-term time frame is shown below. It is from April 17, 2024; to present and from this standpoint maybe you think the pullback isn’t so bad, because it was a 50% retracement level that got hit and SPY may be finding support and initiating bullish options trades can be considered again.
(Note that I did not call the 50% level a ‘Fibonacci’ level, because it isn’t a fib number so it is not a fib retracement level, but because 50% retracements or extensions are popular in technical analysis you will see that level added in to Fibonacci tools in other software’s).
OR…
You look at the longer-term time frame I am showing below, which is from October lows of 2023 to present.
Looking at this longer-term time frame one can see the Fibonacci retracement levels over this time frame are at much lower prices from here.
I am not predicating these levels will get hit. I wasn’t anticipating things hitting these current lower levels as quickly as they did, so the markets (SPY) could very well continued its steep drop.
Being Patient is the Key Here
From a bullish perspective. If I were to trade bullish option strategies it would be at a lighter position size, and I would monitor my stops a lot more closely. Bearish opportunities would be monitored just as close, because even though things look weak right now, who knows if a short-term bounce comes in to shake out short-term bears.
If you expect a rate cut in September we don’t know how much the Fed will cut come September and what the market reaction to that would be.
Being patient is the key here.
To your success,
— Tom Gentile
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