CITIC Securities: Conditions and Timing for Stabilization of US Stocks

Recent sharp declines in the US stock market have triggered global market turbulence. Looking ahead, what potential conditions could stabilize the US stock market, and when might this happen?

（1）Easing of negative fundamental expectations: This week, entering a period of flat data could help alleviate recession concerns.

The current round of weakness in the US stock market accelerated from mid-July, with below-expectation data being a major factor: CPI rare negative growth; ISM manufacturing index at 46.8, falling for 4 consecutive months to an 8-month low; non-farm payroll added only 110,000 jobs, unemployment rate rising to 4.3%, triggering recession concerns; retail growth unexpectedly dropping to around 0%, close to negative growth. As a result, recession concerns have significantly overshadowed the positive impact of rate cuts. Under high valuation pressure, the US stock market has shown less resistance to recession trading. However, looking at it more positively, as the phase of concentrated data releases comes to an end, with only CPI being relatively important in the next two weeks, as long as it does not exceed expectations, market attention to economic deterioration may decrease, which is conducive to temporarily alleviating recession concerns in the US stock market.

（2）Fed intervention, signaling market rescue: This week, entering a period of intensive official statements, dovish remarks may serve as a soothing agent.

After the interest rate meeting, Fed officials will start speaking this week for policy communication. With inflation risks basically resolved and intensified economic and market turmoil, it is expected that the stance will further "turn dovish". As long as market attention returns to "rate cut trading", the downward pressure in the short term will naturally ease.

（3）Reduced interference from mid-term performance reports: In the fourth quarter, attention may rise on the sales of a new round of AI products.

The highlights of US earnings season are relatively limited, with the performance of star tech companies falling within normal range. Against the backdrop of high expectations, the market lacks catalysts and undergoes adjustments, which is a normal phenomenon. For example, after companies like Microsoft reported lower-than-expected earnings, US tech stocks faced selling pressure and profit-taking was quite common. However, the logic of AI is still ongoing, especially with a new round of AI-tagged products set to enter the market by year-end, the market is still very much looking forward to sales performance. Regardless of end sales, upstream hardware companies are still likely to see revenue improvements.

（4）Decrease in the impact of the yen carry trade reversal: Looking at the recent trend, short-term pressure may have been sufficiently released.

With the Bank of Japan raising interest rates and global stock market plunges, the already crowded yen shorts began to unwind, partially reversing the carry trade, leading to capital outflows from the US stock market, which could amplify short-term fluctuations in the US stock market. From a data perspective, since the beginning of the year, a large number of yen short positions have been established above 150, and the yen has rapidly appreciated to below 150 recently, potentially causing significant unwinding pressure. This is also one of the driving factors behind the recent sharp stock market volatility. However, based on historical experience, as long as this kind of trading factor does not give rise to a comprehensive liquidity crisis, what comes quickly will also go quickly.

（5）Decrease in Disturbance from the Election: Suppression in the Short Term Will Still Exist, and Systematic Relief Will Come After the Election.

The suppressive effect of the election year on the performance of the U.S. stock market should not be underestimated. Election day remains a traditional watershed for the performance of the U.S. stock market. From historical data, whether the ruling party can be re-elected affects the market characteristics in election years. If the ruling party ultimately wins, the S&P 500 index has higher returns before the election and lower volatility; but if the ruling party fails to be re-elected, the S&P 500 index has lower returns before the election and higher volatility. Currently, Trump still has a certain advantage in the election, and as we enter the crucial three months before the election, the U.S. stock market may still react to some political turbulence.

（6）Short-Term Adjustment Range in Place: A 10% Decline is Normal in Recent Years.

Since 2021, significant corrections in the U.S. stock market have not been uncommon. On average: the S&P has had relatively small drawdowns, averaging 11%, but with longer drawdown periods averaging 49 days; the Nasdaq has had larger drawdowns, averaging 12%, but with shorter periods averaging 39 days. A decline of around 10% has significant implications, and if breached significantly, the probability of entering a 20% deep decline and a technical bear market greatly increases. In this round, the S&P and Nasdaq have already fallen by 6% and 10% respectively, and the following week will be a critical period to see if they can stabilize around 10%.

（7）Can Short-Term Liquidity Crisis be Avoided: Observing the Trend of the U.S. Dollar Index

If a local trading stampede evolves into a global liquidity crisis, it will make short-term stabilization of the U.S. stock market a luxury. How to observe this risk? Simply put, the U.S. Dollar Index is a good observation indicator. If a global liquidity crisis occurs, the scarcity of the U.S. dollar is likely to increase, and the U.S. Dollar Index will rise. Similar to the initial stage of the stock market crash during the COVID-19 pandemic in 2020, the U.S. Dollar Index initially declined, but later evolved into a liquidity crisis, causing a significant increase in the U.S. Dollar Index. Currently, in this round of decline, the U.S. Dollar Index is still steadily declining, indicating that the risk is temporarily under control.

Overall: Economic data has entered a quiet period, the signal for interest rate cuts may become clearer, the negative feedback from carry trades will not persist indefinitely, performance expectations have not systematically collapsed, the decline in the Nasdaq has already reached historical average levels, and there are conditions for stabilization in the US stock market in the next two weeks; the main risks going forward are economic recession and liquidity crisis, with a focus on signals of the US dollar trend.

Authors: Qian Wei S1440521110002, Zhang Yican S1440523070002, Source: CITIC Securities Research, Original Title: "Conditions and Timing for Stabilization of the US Stock Market"