Building Wealth Doc's note: Despite markets largely recovering from the market chaos earlier this month, lots of folks are wondering if it's just the beginning of the next bear market.
Today, Marc Chaikin – founder of Chaikin Analytics – explains what caused that Monday crash, why there's still fear in the markets, and what's likely to happen next month...
Investors are still reeling from the mayhem earlier this month...
The Bank of Japan ("BoJ") caused financial chaos as it unexpectedly raised its prime lending rate... and then walked back the prospect of future rate hikes.
Two weeks ago, Japan's stock market suffered its worst single-day decline in 37 years. Just one day later, it saw its best single-day gain since 2008.
Here in the U.S., the S&P 500 Index was already weakened by profit-taking in the tech sector. It then collapsed by 3% the same day in the wake of the BoJ rate increase.
But by the end of the week, it had regained all its losses.
Folks, we're in the most challenging part of the presidential-election-year cycle. And early August is normally a tough period for the stock market.
Looking ahead, September volatility will be predictably harsh. I'm looking for a sell-off into early October as a major buying opportunity for a strong year-end rally.
But the reaction to the BoJ's rate hike pulled forward September's extremely volatile price action. And that turned a pullback into a rout.
However, a volatile period doesn't change my overall conviction...
Even considering the carnage on Monday, August 5, the damage in the S&P 500 has been contained to a less than 10% intraday decline and a less than 9% drop on a closing basis.
That was from the index's all-time high on July 16. As of Friday's close, the S&P 500 is down about 2% from that high.
Outside the beaten-down "Magnificent Seven" mega-cap tech stocks, the other 493 stocks in the index – as measured by the equal-weighted Invesco S&P 500 Equal Weight Fund (RSP) – are down only about 2% from all-time highs.
The real story in the markets earlier this month was a huge spike in the CBOE Volatility Index ("VIX")...
The VIX is often called the market's "fear gauge," since it measures expected volatility. Going into August, it was below 17. On August 5, it spiked to more than 60 intraday before settling at a still-elevated level of 39 by the time markets closed.
As of last Friday's close, it was below 16.
So... what does it all mean?
In short, traders were nervous.
It was due to a highly questionable jump in the unemployment numbers to 4.3% (which may have been influenced by Hurricane Beryl in Texas) and a steep drop in the Japanese stock market.
By the end of the week, the large-cap indexes had regained all of that Monday's steep losses... while small- and mid-cap indexes performed even better.
In fact, more than $10 billion flowed into equity exchange-traded funds ("ETFs") and mutual funds. Meanwhile, more than $6 billion flowed into U.S. equities... and $4 billion went into Japanese stocks. This marked the 16th straight week of inflows into equities.
So, to sum up...
Yes, traders are still fearful. We can see that through CNN's Fear & Greed Index, which is a gauge of investor sentiment based on seven indicators. In its reading earlier this morning, the index stood at 35 out of 100.
That marks a "Fear" level – meaning sentiment is bad. Two weeks ago, the level was at "Extreme Fear."
Meanwhile, the VIX remains elevated from the late July lows.
But two weeks ago, "buy the dip" investors were a key stabilizing factor for the markets. Put simply, the market hasn't run out of "bullish" investors.
Looking ahead, I expect typical September volatility and overly dramatic election-year headlines to wreak havoc with investors' emotions...
But my conviction in a post-election rally remains firm.
I continue to expect a rally in the S&P 500 to the 5,800-to-6,000 level by the end of the year.
Good investing,
Marc Chaikin
P.S. While Marc is still bullish overall, he says that the market is in for a beating next month. Experience is everything in times like these. Marc has seen it all and points to market indicators that give him more confidence than ever. And right now, he has the perfect strategy for making huge gains in times like these. Click here for all the details.