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Capital Wave Forecast: Don’t Cry for the Stock Market, Just Yet

0 | By Shah Gilani

It looks like another manic Monday with futures indicating a down opening, maybe to the tune of a couple hundred Dow points.

But this Monday doesn’t have to be a replay of last Monday’s more than 700-point plunge, though it could be.

But I doubt it…

As volatile and ugly as last week was, especially Monday’s plunge on the heels of the previous week’s hard sell-down, the Dow ended last week down only 197 points.

The Dow’s only down 4% from its all-time high of 27,398 registered less than a month ago.

Year to date the Industrials are up a very handsome 12.69%.

And, though the Nasdaq Composite ended last Friday down the worst of major benchmarks, it was only off 44.93 points on the week.

The Nasdaq, only off 4.5% from its July all-time highs, is up a whopping 19.95% year to date.

That’s why I say, “Don’t Cry for the Stock Market.”

At least, not just yet….

Volatility, News Flow, and Investor Psychology Is the Triple Threat This Week

As volatility kicked in last week (we made a nice triple digit gain on our VIX calls in my newsletter The Money Zone) and psychology turned negative, the standout culprit was the plunge in yields, here in the U.S. and globally.

That too has subsided, for now.

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That back-up in yields, with the U.S. 10-year falling to a hair below 1.60% on Monday, then rising on Thursday to 1.78%, signaled hope for the market. Maybe yields collapsing wasn’t a sign of impending recession and gloom and doom; otherwise, how could they bounce back so quickly to almost 1.8%?

This week is going to be about volatility, volatility, volatility, followed by news flow, followed by investor psychology.

In other words, how investors trade the news flow this week (which there may not be a lot of, with the exception of retail earnings that could come in below already beaten down consensus estimates and signal weakening consumption) and how gaps in bid-offer spreads, which affects price movement in both directions and adds to volatility, will determine if markets calm down or continue to be on edge.

The base case for stocks is positive. They are the best returning instruments and U.S. stocks are the cleanest dirty shirt in the laundry of global garments.

What to watch this week:

  1. The price of oil: If oil stabilizes, the markets will mellow. If oil plunges, stocks will too.
  2. China: News flow on the U.S. and China going to talk in September or not will move markets.
  3. Earnings: Lots of retailers announce this week. How they do may set a tone for stocks.

We’re not out of the woods, by any means, but a calmer day today would go a long way, especially if we end the day flat to higher after futures are ugly this morning, could set investors more at ease.

Still, there’s fear out there and lots of negative rhetoric flowing in from all quarters. It would be easy to scare investors with an early week sell down.

But, my guess, and it’s a guess this morning, is we’re not crying, so don’t shed any tears for the market, just yet.

Sincerely,

Shah

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