Summary
The Dow Jones Industrial Average (^DJI) reached a new record high on Thursday, marking its third record close this week. However, the tech-heavy Nasdaq Composite (^IXIC) and S&P 500 (^GSPC) slipped into negative territory after Nvidia's (NVDA) second-quarter earnings failed to impress Wall Street investors. Despite this, Yahoo Finance markets and data editor Jared Blikre points out that cyclicals are leading the way, with financials being the top sector for the week. However, he also warns that a reversal in the US dollar could be a headwind for the market.
Cyclicals Take the Lead
It's clear that cyclicals are taking center stage this week. Financials are the top sector, followed closely by energy and industrials. These sectors are typically associated with value rather than growth, which suggests that investors are shifting their focus from tech to more traditional cyclical plays. The price action over the past four days has been strong, with financials being a clear leader.
Berkshire Hathaway's Entry into the Top 10
With its market capitalization now surpassing $1 trillion, Berkshire Hathaway is no longer just a significant player in the market, but also one of the largest. As the biggest stock within the top 10, it's worth noting that Geico, one of its subsidiaries, contributes significantly to this growth. The presence of Berkshire Hathaway among the top stocks reinforces the notion that financials are leading the charge.
Reversal in the US Dollar
Jared Blikre highlights a reversal pattern in the US dollar, citing a chart of the Dixie (USDX) over two months. This reversal is seen as a longer-term play and could have significant implications for the market. The pattern suggests that the dollar will decline from its current levels to somewhere lower down on the chart. However, the speed at which this occurs matters significantly.
Emerging Markets vs. US Dollar
When it comes to emerging markets, Blikre advises investors to look for countries where they are outperforming the US. A rising dollar can signal risk aversion among investors, which could be problematic for risk assets. Therefore, a slow and steady decline in the dollar would be preferable.
Volatility Shock: August's Spikes
A recent note from BFA highlights that August is one of the months with the highest number of spikes in volatility (VIX). Historically, 38 three-standard-deviation moves occur in this month. This is second only to October and suggests that investors should be cautious. The combination of August's high volatility and the upcoming buyback window closure on September 6th presents significant challenges.
The VIX's Seasonal Pattern
Jared Blikre notes that the VIX tends to trend upwards during this time of year. This can be seen in a chart comparing the current year's VIX with its average over the years. The spike this year has been consistent with historical patterns, indicating potential tailwinds turning into headwinds.
Conclusion
In conclusion, while cyclicals are leading the way, there are significant challenges ahead for investors. The reversal in the US dollar and the volatility shock of August's spikes should not be ignored. As Jared Blikre points out, what were once tailwinds are becoming headwinds. It is crucial for investors to remain cautious and consider these factors when making investment decisions.