$QQQ and $SPY Navigating Market Volatility: Is This a Bear Market or Just a Correction?

As you can see in the screenshots below, the Nasdaq 100 ETF ($QQQ) sold off by more than 10%, and the S&P 500 ETF ($SPY) sold off by more than 5%. Is this the start of a bear market or just a correction?

First, let's discuss how this all began on July 11th. What triggered this sell-off? On July 11th, economic data was released, including a negative CPI report. This may have led smart money to decide it was the top, anticipating rate cuts that the Fed was late to implement. This caused a significant sell-off on July 11th, followed by a brief pullback and another sell-off, as observed in the screenshots.

Then, on July 24th, another significant economic event occurred: the PMI came in under 50, which is a major warning sign.

We all know that when the Fed keeps rates high for longer than needed, a recession often follows. Even if they start to lower rates, it may not help immediately. You can check all these charts here

The next big hit was due to the Initial Jobless Claims, which came in near 250k, and the ISM PMI dropped as low as 46 on August 1st (which under 50 is a warning sign), followed by a sharp drop in Nonfarm Payrolls on August 2nd.

At the same time as the July 11th sell-off in SPY and QQQ, small caps like IWM and the equal-weighted S&P 500 RSP were rising with huge volume. This indicates that the market expects a rate cut soon, as it often prices in ahead of the action. Hence, buy on rumors and sell on news. Usually, when the first rate cut happens, the market drops. This time, even before the rate cut, there was almost certainty that the first cut would happen in September, leading to a market sell-off.

Now, what is next? Is it a bear market or a deep correction? For it to be considered a correction, the index should fall 10%, but SPY hasn't made a 10% pullback, and the RSI for SPY is also not in oversold territory. So, I expect SPY to fall further (probably after some consolidation) down to 503 to close the gap and then bounce. That bounce could either go up and make a new all-time high or, after a brief rally, fall and make a new lower low, indicating the onset of a bear market. I think the latter scenario is more probable, especially considering the high likelihood of a US recession. Therefore, a bounce followed by a further decline seems highly probable.

Anyway, we can always trade based on levels without hesitation, using stops to manage risk-reward ratios.

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