U.S. indexes would open the day in the red after some volatile price action in the premarket. Prices would stay around the opening price for most of the day after an initial selloff following the bell, and would fall once again near the close to bring markets deeper into the negative to cap off the day. U.S. Retail Sales came in at 0.7% compared to a 0.2% expectation, this sparked more fears about the Fed keeping rates higher for longer.
Asian markets mostly retreated this morning following the US’ drop in yesterday’s session. Japan’s manufacturing sentiment index jumped to +12 in August compared to +3 in July, which is its highest level this year. The latest data out of China showed housing prices declining for the fifth time this year (-0.1% YoY), and yesterday they saw both retail sales and industrial production come in below expectations once again. Russia yesterday hiked interest rates by 350 basis points (3.5%) to curb the rapid plummet of their local currency.
European markets fell on Tuesday as the UK’s unemployment rate jumped to 4.2% which was above expectations while simultaneously, new data showed UK wages surged to hit a record high growth rate.
The VIX would open yesterday's session at $14.95, and prices would reach a low shortly thereafter at $14.91. Prices would climb throughout the day, reaching a high of $16.57 before closing slightly lower at $16.46.
Inertia would move back in favor of the VIX bulls, and sustain its overall upward momentum despite the drop in prices in Friday’s and Monday’s sessions. Strength would rebound in favor of the VIX bulls in yesterday’s session after nearly breaking below the centerline in Monday’s.
Following the war of attrition that was playing out at the $15.78 level, the VIX bears managed to break prices below that mark for two consecutive days. But the VIX bulls proved themselves once again and managed to cause a false downside breakout below the level, and shoot prices back above it.
We do believe the VIX bears will break the MACD-H below the centerline sooner rather than later, as the VIX bulls have held the indicator in positive territory longer than what the average is. Once a shift inevitably occurs, the VIX bears will likely be weak, which would be reflected in little price action to the downside and another war of attrition before the VIX bulls fully take over. There is a possibility that they don’t bring strength back into their control and break the MACD-H over the centerline because of their underlying weakness, but this is unlikely.
The S&P would open lower on the day at $4,478, which also turned out to be the high on the day. Prices stayed flat throughout the session, but selloffs after the open and near the close would cause an even bigger decline in the session, reaching a low of $4,432 before closing at $4,437.
Inertia would continue moving in favor of the bears and is slowly picking up more steam. Strength would move in favor of the bears as well after the bulls managed to make a move in Monday’s session.
The bears were finally able to break prices below the minor support of $4,450 in yesterday’s session. The only question remains is if they can sustain it. We should have a better idea whether this was a false or true breakout after today’s session.
1.) MarketWatch: UK inflation fell in July, but Bank of England under pressure as core rate held steady
2.) Bloomberg: China asks some funds to avoid net equity sales as markets sink
3.) Bloomberg: China shadow bank crisis sparks protest by angry investors
4.) Financial Times: London rents jump 5.5% in July, largest annual rise since 2006
Warren Buffett’s Berkshire Hathaway and Michael Burry’s Scion Asset Management released their 13-F filings for Q2, which showcases a snapshot of their portfolio as of June 30. It works similar to how a balance sheet works, i.e. it is essentially a screenshot of their portfolios on the day it is taken and doesn’t cover a period of time like an income statement does. We pay specific attention to companies like Berkshire Hathaway, Scion, and Bridgewater Associates when changes are made to their portfolios because it can be used as a key insight into what the best minds are thinking going forward.
Warren Buffett and Charlie Munger sold several positions in Q2 and slashed several existing ones while adding a trio of property developers to their holdings. They sold their stakes in McKesson (a medical supply company), Marsh & McLennan (a financial and insurance institution), and Vitesse Energy in Q2. They also trimmed their stakes in Chevron by 7%, Activision Blizzard by 70%, Celanese (a chemical materials company) by 39%, General Motors by 45% and Globe Life Insurance by 60%. Three property developers were added in Lennar, NVR, and DR Horton, valued at $17 million, $71 million and $726 million respectively. Lastly, they boosted stakes in Capital One by 26% and Occidental Petroleum by 7%, which they’ve been adding to regularly.
Buffett’s company foreshadowed their stock sales in their recent earnings report and noted that it sold nearly $13 billion worth of shares and bought less than $5 billion. Buffett’s lack of stock purchases, buybacks, big acquisitions and continuously growing stockpile of cash, up to a near record amount, show that he’s struggling to find bargains to say the least. A few weeks ago we noted that Warren Buffett’s favorite indicator of the stock market, which compares the total value of the stock market ($47.6 trillion roughly) to the US’ total GDP ($26.24 trillion) is at 182% as of right now. Anything over 80% WB considers overvalued, and this is just about at the mark we were last year before stocks fell. Personally, we think Buffett is trimming his “riskier” assets to hedge against a potential downturn.
For those who don’t know, Michael Burry rose to fame by predicting and betting on the collapse of the US economy before 2008 and his fund, Scion Asset Management, made hundreds of millions on its downfall. According to Burry’s 13-F, he’s using more than 94% of his portfolio to bet on a market downturn as of the end of Q2. He bought $866 million in put options (the right to sell an asset at a particular price) against a fund that tracks the S&P 500 and another $739 million in puts against a fund that tracks the Nasdaq 100.
Burry has been saying for a long time now that the market and US economy is heading for something similar, if not worse than what happened during the GFC. Burry’s investment and trading record is impressive to say the least, averaging 56% in annualized returns over the last few years (according to an analysis by Sure Dividend), and successfully predicted the stock market drop in 2022. If he’s loaded up this much on bearish bets, it makes us feel slightly more comfortable in our analysis going forward.
Futures are edging down now as we head towards the open, as it looks likely the markets will open low once again. The bears have shown strong reliance against the bulls, but people are still mostly bullish, at least within the media’s and analysts' coverage besides a few outliers. Bond yields are continuing to trickle up as well, which is adding more and more pressure to equities. There are a few key reports being released today that we’ll cover in tomorrow’s report, unless something larger comes out today that needs to be covered. We hope you found this helpful, learned a thing or two, and have a great day.