Friday Thoughts

Bull Run Corrections / Self Mastery Series

A quiet summer isn’t really what markets have given us so far in July. I wrote in last Friday’s thought piece that implied correlations were at record lows, with single-stock volatility soaring while index-level volatility remained subdued. This condition normally unwinds and has, on previous occasions, also led to a healthy correction. Read the piece below for a full walk-through and logic.

Of course, a single element or factor in isolation is usually not solely responsible for triggering an event. A few ducks need to align. It was interesting to observe the technical side and the continued drawdown in the KOSPI, as well as the somewhat sluggish behaviour in the Nikkei this and last week. Our dashboard and charts over at pa-globalmacro.com hinted that a rally was losing steam, a trend also confirmed by our asset allocation model, which has passed on allocating to stocks over the past few weeks. The model, for all subscribers, is now also available on the site and updated weekly.

I have been eyeing up a correction for a few weeks now, and I am happy to see it slowly developing. Aside from global cross-reads, this week also showed that stocks couldn’t rally properly on weaker inflation prints. What historically would have jolted markets higher proved very short-lived. Of course, the ongoing geopolitical scare in the Middle East is not helping.

Have we finally run out of bullishness?

Not so fast. The well-documented earnings boost was a good reason for stocks to rally, but that’s now well-digested. Markets move from narrative to narrative, and I think we might have just run out of the old story, even as we are just about to enter earnings season, which many expect to be solid. Markets top before earnings top. That’s just how it is.

I think we are entering a healthy correction. Below the paywall, I analyse historical patterns of correction and subsequent recoveries. Every 10% drawdown produces the same argument: is this the top, or is this the entry? Nobody knows in real time, but the base rates are knowable, and better to have them before the next one arrives than to look them up halfway down.

I’ve catalogued every drawdown of 5% or more that occurred inside six major equity bull markets without ending the advance: the Nasdaq in 1995–2000 and 2016–2021, the Nikkei 1985–1989, the Shanghai Composite 2005–2007, the S&P 500 2009–2020, and the current Nasdaq run from its December 2022 low to 15 July 2026.

The question I most wanted answered: Is the current Nasdaq drawdown unusually shallow compared with history?

Answers below. We will also hear from Macro D, who will reflect on the trading week and the new Macro FX trades he engaged in.

Investing and trading aren’t meant to be easy, and we are mostly our own worst enemies. In a newly launched series of reflections on self-mastery, I am offering a first glimpse into the psychology of ourselves and the pitfalls most of us fall into. I made the post free, as is the ethos here for all educational pieces.

Enjoy!