Can A Fed Hike Actually Save The Day?

1.) KOSPI – The South Korean stock market is at it again, down -10.84% overnight. That sounds like a lot…and it is. But it’s not abnormal for their market either. I’ve pointed out over the last month or so how this index is extremely volatile. On July 16, I commented on how the KOSPI broke trend (confirmed on the 15th). It was at 7284 then. Today it sits at 6024, down -17% from that trend break. What’s the point? Trends are valuable, but not just some random, single-factor number. We use a calculation derived from the rate of change of price, volume, and volatility. Multi-factored. And when trends break, it’s usually not a good idea to buy them…and in many cases – like volatile items like KOSPI – to hold them. So what’s next? Likely continued volatility until some of the big semi and AI hyper-scaler names can get past earnings and the Fed makes its decision (tomorrow). There is some psychological support for the KOSPI down around 5700, so it would not be surprising to see the South Korean index touch that. Bigger implications for the US tech market arise when big US-traded names start acting poorly, which on the margins we’re seeing. XLK is the US Tech sector tracker, and RSPT is the equal weight tech exchange-traded fund. So far, XLK is looking to flirt with trend today, but RSPT is still holding up. What does that indicate? That big tech is still under pressure.

2.) BUYBACKS – It’s currently estimated that about 31% of S&P 500 companies (by count) are in their open window to buy back their own stock. By the end of next week, it’s estimated that about 53% of the S&P 500 will be in that open window. This would bring one of the market's larger buyers back into equities. We’ll see if that helps reverse the downward tech pressure.

3.) POSITIONING – There are a lot of bets in this market that the Fed will come out hawkish or signal rate hikes versus anything else. Investors have placed an extremely high-conviction bet that the hawkish repricing we've already seen over the past few weeks has further to run. Remember, when one side of the boat gets too full, it’s usually a better idea to go to the other side of the boat! That being the case, it may not take much to unwind all of this positioning. In fact, the real paradox, which markets specialize in, may be that a Fed hike itself becomes the catalyst that unwinds these crowded hawkish bets, which would be more bullish for equities than not. SOFR is the Secured Overnight Financing Rate, which is a benchmark interest rate that measures the cost of borrowing cash overnight in the U.S., collateralized by U.S. Treasury securities. You can see below that hedge funds and systematic funds are very net short those rates and very long the US Dollar, pointing to their bet that the Fed hikes. We'll see.