Hello friends,
It looks like the flush has finally begun for good. Even the recalcitrant SPX and NASDAQ Composite have been confirming a new down-trend with lower Lows in price, and both are also in the process of challenging their previous up-trend line:
For now, the SPX is finding some support at the 200DMA – the bulk of the market participants that piled into the AI euphoria don’t want to believe the rally is over and are using this point to average down.
As the rest of this report will detail, the signs are pretty clear that we are most likely not dealing with anything more than a dip-buying and short-covering bounce that might roll into mid- or end-October. There is just not enough power in this market to drive substantial advances for now.
A handful of large-caps continue to sugarcoat carnage
While selling volume has somewhat abated in the very short-term, it is still highly raised in a 4-6week window, suggesting distribution of large blocks of shares across the market in the observed leg down. The market always obeys the big money flows, and for the moment that is decidedly not in, at least not to a degree that is noteworthy. A few times again over the last 2-3 weeks, some support in the very narrow set of large-caps known as the Magnificent-7 (or mega-8) has lifted the popular indices, masking carnage in the smaller and broader segments of the market (mid-, small- and microcaps).
As an example, see the microcap ETF IWC, which has just made a 3-year Low:
Less catastrophic but still very menacing selling is visible in the mid- & small-cap segments, for example reflected by the Russell 2000, or even just the NYSE Composite:
The whole market is confirming the current selloff, and the July Highs do most likely reflect the current top for this market rally.
Internals continue to deteriorate
More ‘meta’-descriptors of market breadth are confirming the continuing and worsening weakness as well.
For example, the net amount of stocks making historic price Lows is outpacing those making new price Highs by a factor of >11:1 – a definite no-go for any hope of a healthy market. While over the last few months this dynamic manifested stronger on NASDAQ than on NYSE, now the latter and its largely cyclical constituents has been afflicted by the same weakness:
See here new Highs vs new Lows (NHNL) in aggregate, and below the net number split by exchange:
The broad starting down-trend in the market is equally confirmed by advance-decline lines of both exchanges. As for the NHNL gauge, the NYSE A/D line (broader insight into cyclicals) has just recently started falling in lockstep with the down-trend of the NASDAQ A/D, which has at this point already lasted for years:
Though sentiment has been dropping and fear rising (e.g. the VIX), both are nowhere near levels that would mark a washout of the until-recently euphoric environment in the equities market.
Laggards continue to lead
In a nutshell, capital flows are still strongest into cyclical and laggard industries that are reflective of a late-stage market top – construction & heavy machinery, electronic industrials and capital goods (e.g. check out charts for JBL or FN), and legacy energy & resource stocks.
But something relatively outperforming a weak market does not make it a great opportunity. Price action in the mentioned groups is victim to whipsaws, heavy selling near new price Highs, and commodity price undulations.
Coal remains the strongest group hands down, while its sister oil & gas (O&G) has been experiencing heavy volatility. In fact, while most coal stocks easily absorbed a whipsaw a few days back and hold up strong, most O&G stocks have become target of heavy selling (e.g. XOM, SLB):
On the other hand, home-builders as a more consumer discretionary-type group that had been experiencing somewhat of a renaissance of late, have followed the lead of the market and rolled over for the moment:
Better-grade stocks falling thick and fast
It is most likely that there will not be true fear in the market until the all-eyez-on-me stock NVDA will throw in the towel and start dumping into a new down-trend. There is just too much trust in that stock, trust in a future that been priced in long ago.
But we don’t even need to look there to know that price action has been reluctant at best and precarious at worst.
Recent leaders such as CELH, IOT, AEHR or NXT have started selling hard (once again). The only stock left showing truly constructive price action is VRT – but it cannot hold the market up by its own strength.
Conclusion
The market remains without substance – though a multi-week bounce might (!) ensue due to funds buying into the dip and shorts covering, this should not be construed as more than a short-term trading opportunity (e.g. some intelligent options spreads). Despite a strong Friday move on the NASDAQ Composite and SPX, leading stocks remain absent and weak, the market thin, and opportunities for speculating in strong trends for a large payout the stuff of myths.