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US stocksThe recent sharp drop has caused turmoil in global markets. Looking forward, what potential conditions may cause the US stock market to stabilize, and when will it do so?

(1) Negative expectations on fundamentals ease: This week, the data will enter a period of calm, which will help to get rid of recession concerns.

This round of US stocks has accelerated its weakening since mid-July, and data that is lower than expected is a major cause: CPI rarely shows negative growth; ISM manufacturing index is 46.8, falling for four consecutive months, hitting an eight-month low; non-agricultural additions are only 110,000, and the unemployment rate has risen to 4.3%, triggering Sam's recession rule; retail growth unexpectedly dropped to around 0%, one step away from negative growth. Affected by this, recession concerns have greatly overshadowed the positive impact of interest rate cuts. Under the pressure of high valuations, the resistance of US stocks turning to recession trading is relatively small. But looking at it more positively, the data release phase has come to an end, and only CPI is more important in the next two weeks. As long as it does not exceed expectations, the market's attention to economic deterioration may decline, which is conducive to the US stock market temporarily getting rid of recession concerns.

(2) The Fed intervenes and sends a signal to rescue the market: This week, officials will begin to speak out intensively, and dovish remarks may become a mitigating factor.

After the interest rate meeting, Fed officials will begin to speak this week to communicate on policy. With inflation risks basically eliminated and economic and market turmoil intensifying, it is expected that the stance will further "turn dovish". As long as the market's attention returns to the "rate cut trade", the short-term downward pressure will naturally ease.

(3) Interference during the interim results period decreased: In the fourth quarter, sales attention to the new round of AI products may increase.

The highlights of the US stock earnings season are relatively limited. The performance of star technology companies is within the normal range. In the context of high expectations, the market lacks catalysts and takes into account adjustments, which is a normal phenomenon. For example, after Microsoft and other companies announced performance that was lower than expected, US technology stocks were sold off and profit-taking was common. However, the logic of AI is still continuing, especially at the end of the year, a new round of AI-labeled products will be launched on the market, and the market is still very much looking forward to sales. Regardless of terminal sales, upstream hardware companies are still likely to improve their revenue.

(4) Japanese YenCarryThe impact of trading reversal has decreased: judging from the trend in the past two days, short-term pressure may have been fully released.

The Bank of Japan raises interest rates and superimposes the globalstock marketThe market plunged, and the already crowded yen shorts began to close their positions.CarryThe partial reversal of trading has led to the withdrawal of funds from the US stock market, which may amplify the short-term volatility of the US stock market. According to the data, since the beginning of the year, a large number of short positions in the Japanese yen have been established above 150. The recent rapid appreciation of the Japanese yen to below 150 may cause considerable pressure to close positions, which is also one of the driving forces of the recent sharp fluctuations in the stock market. However, according to historical experience, such trading factors, as long as they do not give rise to a comprehensive liquidity crisis, will come and go quickly.

(5) The disturbance caused by the general election will decrease: Suppression will still exist in the short term and will only be alleviated systematically after the election.

The suppressive effect of election years on the performance of U.S. stocks should not be underestimated. Election Day is still the traditional watershed of U.S. stock performance. From historical data, whether the ruling party can be re-elected affects the characteristics of the stock market in election years. If the ruling party can ultimately win, the S&P 500 index return will be higher before the election and the volatility will be lower; but if the ruling party cannot be re-elected, the S&P 500 index return will be lower before the election and the volatility will be higher. Trump still has a certain advantage in the current election situation, and entering the critical three months before the election, the U.S. stock market may still reflect certain political fluctuations.

(6) The short-term adjustment range is in place: In recent years, a 10% drop is normal.

Since 2021, major adjustments in the U.S. stock market are not uncommon. On average: the S&P's retracements have been smaller, averaging 11%, but the retracement period is longer, averaging 49 days;NasdaqThe retracement is larger, averaging 12%, but the cycle is short, averaging 39 days. A drop of about 10% has a strong watershed significance. If it breaks through sharply, the probability of entering a 20% deep drop and a technical bear market will greatly increase. In this round, the S&P and Nasdaq have fallen by 6% and 10% respectively. The next week will enter a critical period. Whether it can be stabilized at around 10% is very important.

(7) Whether a liquidity crisis can be avoided in the short term: observationUS Dollar IndexTrend

If the local trading stampede turns into a global liquidity crisis, it will make it impossible for the US stock market to stabilize in the short term. How to observe this risk? Simply put, the US dollar index is a good observation indicator. If there is a liquidity crisis in the global market, the scarcity of the US dollar will increase with a high probability, and the US dollar index will rise. Similar to the 2020 COVID-19 pandemic, the US dollar index fell at the beginning of the US stock market crash, but then it evolved into a liquidity crisis and the US dollar index rose sharply. At present, in this round of decline, the US dollar index is still declining steadily, and the risk is temporarily controllable.

In general: economic data has entered a window period, the signal of interest rate cut may be clearer, the negative feedback of carry trade will not continue, there is no systemic collapse in performance expectations, the decline of Nasdaq has reached the historical average level, and the conditions for US stocks to stabilize in the next two weeks; subsequent risks mainly lie in economic recession and liquidity crisis, and attention should be paid to the trend signals of the US dollar.

Authors: Qian Wei S1440521110002, Zhang Yican S1440523070002

Source: CITIC Securities Research

Original title:Conditions and timing for the US stock market to stabilize》