Be cautious! After "Black Monday", there is still $900 billion in selling pressure on the way

On Monday, global assets plunged into a "Black Monday." Earlier, most people thought it was too early for the "US recession theory" to start attracting attention, whether the hot stock market this year has gone too far.

From New York to London and Tokyo, stock markets were hit hard. Just as the market began to celebrate the first rate cut signal from the Federal Reserve, US stocks were hit by a perfect storm - weak economic data, disappointing corporate earnings, tense positions, and poor seasonal trends.

Although the S&P 500 index regained some lost ground, the index experienced its largest drop in about two years amid strong selling pressure. The tech-heavy NASDAQ 100 index saw its worst start to a month since 2008. Wall Street's "fear index" VIX saw its largest increase since 1990 at one point.

US Treasury bonds soared, with the yield on the 2-year Treasury bond sensitive to monetary policy briefly inverting with the 10-year Treasury bond yield, but then lost some momentum. Traders are betting that the US economy is on the brink of rapid deterioration, and the Fed needs to start easing policy on a large scale. The magnitude of this repricing was so great thatthe swap market earlier expected a 60% chance of an emergency rate cut by the Fed in the coming week**, although this probability has since decreased.

Callie Cox of Ritholtz Wealth Management said, "The economy is not in crisis, at least not yet, but we are in a danger zone. If the Fed does not better understand the cracks in the job market, it could lose control. There is no collapse yet, but it is collapsing, and the Fed may lag behind the curve."

Quincy Krosby of LPL Financial said that after such a strong rebound, valuations, sentiment, and positions have all become tense. " The market is experiencing a liquidation of long positions," she said. "The market is still watching for signs of Fed surrender, evidence of economic growth, and the S&P 500 successfully testing the 200-day moving average for signs of a bottom."

The sharp drop in the US stock market proved some famous bears right, as they issued double warnings about the risks of economic slowdown. Mislav Matejka of JP Morgan said that due to weak business activity, declining bond yields, and deteriorating profit prospects, the stock market will continue to be under pressure. Michael Wilson of Morgan Stanley warned that the risk-return ratio is "unfavorable."

"This does not look like the 'recovery' backdrop that people hoped for," Matejka wrote. He added, "We remain cautious on the stock market, expecting a phase where 'bad news is just bad news'."

Seema Shah of Principal Global Investors believes that concerns about economic weakness may prove to be overdone, but the depth of negative commentary currently suggests that the market is unlikely to turn around immediately. Sustained market recovery requires a catalyst, or possibly a combination of multiple catalysts, including the stabilization of the yen, strong earnings data, and reliable data releases. UBS Investment Bank's Maxwell Grinacoff pointed out, "Similar to what we saw a few weeks ago in the rotation of small-cap stocks, the tight positioning has clearly exacerbated the level of volatility. The difference today is that, from a macro and earnings perspective, the increase in risk premium levels is fundamentally supported."

Keith Lerner of Truist Advisory Services stated that after a very strong first half of the year, the market has risen significantly on a short-term basis, making the threshold for positive surprises too high, and even a slight negative news could have a big impact.

"From a stock market perspective, our fundamentals have not changed," Lerner said. "Our research still indicates that the bull market is questionable. However, considering the significant rebound in April, heightened emotions, and the fact that we are entering a seasonally weak period in the year, we have always expected a more turbulent environment in the second half of July and August."

Furthermore, historically, after a strong first half of the year, U.S. stocks tend to experience a 9% pullback at some point, even though the market still tends to rise towards the end of the year.

It is worth noting that over the past 40 years, the average maximum intra-year pullback of the S&P 500 index is 14%. Lerner mentioned that despite this, the stock market's average return rate (excluding compounding) is still 13%, with 33 out of the 40 years being positive, accounting for 83% of the total time. Lerner added:

"Although it is always unsettling and usually accompanied by bad news, pullbacks are the ticket to enter the stock market, which is why it offers higher long-term return potential compared to most other asset classes."

Russell Price of Ameriprise stated that investors should rationally consider the current situation. Is the market adjusting because they may see that the stock market has risen too far too quickly? Or is the market declining due to real threats to economic conditions and the possibility of a global economic recession?

Price said, "We believe that the vast majority of evidence supports the former. The U.S. economy is currently slowing to more sustainable rates, but we do not believe an imminent recession is the most likely future path. Even if it were, we believe the Fed has enough firepower to lower rates to stimulate economic activity when necessary, which should once again attract capital to the stock market."

John Lynch of LPL Financial expressed that as investors turn the calendar to August, they may also change their views on the economy. He said, "Since the unexpected rise in the second-quarter Gross Domestic Product (GDP) report less than two weeks ago, the stock market has been hovering near record highs, but more and more people believe that the Fed has waited too long to cut rates and is now behind the curve. While we do not fully embrace the new narrative, one thing seems certain, that there will be more volatility in the future." In recent weeks, systematic funds have sold over $130 billion in global stock market bets Now, as volatility soars, these rule-based participants may take their selling to a whole new level.

According to Morgan Stanley's trading team, including risk parity, volatility targeting, and trend-following strategies, sold $70 to $80 billion worth of stocks on Monday, with at least another $90 billion worth of stocks to be sold over the next four trading days.

In the view of Michael Gapen at Bank of America, the market is once again ahead of the Federal Reserve. Jeff Schulze of ClearBridge Investments stated that a key question for investors is whether this rotation will continue or gradually fade away as before.

With the intensified selling in global stock markets on Monday, JPMorgan's trading department stated that the rotation in tech stocks may be "largely complete," and the market is "approaching" a tactical buying opportunity on dips.

In a report to clients on Monday, JPMorgan's position intelligence team wrote that retail investors' purchases of stocks have rapidly slowed down, trend-following commodity trading advisors have significantly reduced their positions in the stock area, and hedge funds have been net sellers of U.S. stocks. John Schlegel, head of JPMorgan's position intelligence, wrote, "Overall, we believe we are approaching a tactical buying opportunity on dips. However, whether we will see a strong rebound may depend on future macro data."

Paul Nolte of Murphy & Sylvest Wealth Management stated:

"The excitement of the first quarter is quickly becoming a distant memory as weakening economic data is raising calls for the Fed to cut rates quickly, perhaps before the next meeting. We are in the early stages of the 'dog days' of summer, and the situation on Wall Street is heating up