Good morning investors,
Thursday's whiplash proves fear has taken over Wall Street. Nvidia initially surged 5% on stellar earnings before crashing to close down 3% as September's stronger than expected 119,000 jobs killed rate cut hopes. The market wanted weak data to justify Fed easing, instead it got strength that likely means December pause. Bitcoin crashed another 6% to April levels as derivative unwinding forces Wall Street to deleverage across the board. When good news becomes bad news, capitulation approaches.
Opening Bell: Deleveraging Accelerates
S&P futures fall 0.4% with Nasdaq futures down 0.7% while Dow futures edge up 28 points. Nvidia slides another 2% premarket, now down over 10% monthly despite Wednesday's blowout quarter. The disconnect between fundamentals and price action grows extreme as forced selling overwhelms analysis.
Bitcoin's 6% plunge puts weekly losses above 13%, reaching lows not seen since April. This isn't retail panic but institutional deleveraging as derivative positions unwind. When Wall Street gets margin calls, crypto takes the first hit. The cascade from $126,000 to current levels marks systemic position reduction, not fundamental deterioration.
Jobs Strength Kills Rate Cut Dreams
Thursday's delayed September report delivered exactly what the economy needs but markets hate - 119,000 jobs versus 50,000 expected with full-time employment surging 673,000. This strength gives the Fed cover to pause December cuts until the data fog clears from the shutdown disruption.
The market's violent reaction exposes the truth that a lot of investors have this rally being dependent on Fed easing, not earnings. Strong jobs mean no December cut. While I have never thought this rally was solely dependent on the rate cuts, they are a nice put to have behind a surging market. A reset in price action will present opportunities here though.
Derivative Unwinding Drives Chaos
The crypto collapse isn't isolated, it's the canary for broader deleveraging. Wall Street loaded up on leverage during the October rally, using derivatives to amplify gains. Now margin calls force position reduction across every risk asset. Bitcoin gets sold first, then speculative tech, then everything else.
This mechanical selling explains Thursday's 700-point Dow reversal. Algorithms don't care about Nvidia's Blackwell demand or Walmart's raised guidance. They see risk limits breached and sell indiscriminately. Human traders then panic, amplifying the cascade.
Williams' Dovish Signal Gets Ignored
New York Fed President John Williams offered crucial dovish commentary Friday, seeing room for "further adjustment in the near term." But futures have ignored this commentary so far, despite him being a voting member, and is sticking to the narrative that Powell will remain data dependent on the back of September's job strength.
Williams carries more weight than anonymous "many" officials in Wednesday's minutes. Yet fear overwhelms nuance. Markets want guarantees, not probabilities. Without certainty, selling continues.
The Good News Curse
Thursday epitomized the "good news is bad news" psychology gripping markets. Nvidia beats and guides higher? Sell it because valuations stretched. Jobs come in strong? Sell everything because no rate cut. Walmart raises guidance? One winner among many losers.
This inverted logic marks late stage corrections when exhausted bulls capitulate. Every headline gets interpreted negatively. Strong data means tighter policy. Weak data means recession. There's no winning narrative, only reasons to sell.
This is where opportunity lies.
Warner Bros Drama Continues
Warner Bros Discovery receiving bids from Paramount, Comcast, and Netflix barely registered amid Thursday's chaos. The century-old studio's potential sale should dominate headlines. Instead, it's background noise to deleveraging dynamics.
Media consolidation accelerates regardless of market gyrations. Streaming wars proved unsustainable for subscale players. Winners need deep pockets and global reach. The deals will happen whether markets rally or crash.
Technical Damage Mounts
The VIX near May highs confirms maximum fear while breadth deteriorates further. The S&P down 2.9% weekly with the Nasdaq off 3.6% marks significant technical damage. More concerning: good earnings can't stem declines.
Bitcoin at April levels after peaking at $126,000 represents a 30% crash. Nvidia down 10% monthly despite beating everything. These aren't rational repricing but forced liquidation. The question becomes: how much leverage remains?
Final Thought
Fear has completely overtaken this market. Strong jobs that should celebrate economic resilience instead trigger selling because they delay rate cuts. Nvidia's blowout quarter can't overcome derivative unwinding. Bitcoin's crash exposes the leverage still getting purged from the system.
But this is precisely how corrections end, not with resolution but exhaustion. Thursday's 700-point reversal despite Nvidia's beat marks peak emotional volatility. Derivative unwinding creates mechanical selling divorced from fundamentals. Once leverage clears, only real buyers and sellers remain.
The September jobs report showing 119,000 additions with 673,000 full-time gains proves the economy hasn't broken. Walmart raising guidance twice confirms consumers still spend. Nvidia's Blackwell demand "off the charts" validates AI investment. These fundamentals matter once fear subsides.
My year-end rally thesis requires patience through this deleveraging. November's violence sets up December's relief as positions clear and tax-loss selling exhausts. Use fear to accumulate quality gradually. Don't chase bounces but don't panic at declines.
The data drought continues with October employment cancelled and November delayed to December 16. Markets navigate blind while leverage unwinds. This combination guarantees continued volatility. Accept it rather than fight it.
This too shall pass once leverage clears. Quality survives while speculation dies. Position accordingly.
Have a great weekend, and as always, feel free to reach out with questions about navigating these volatile markets.
Best regards,
Dan Sheehan
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.