Hello friends,
Volatility is back – the fairly expected information (higher for longer into 2024) that came out of last week’s FOMC conference nonetheless led to a major spike of long-end yields into multi-decade highs (US 10-year gov. bond yield highest since 2007), paired with a gap-down and sell-off on all indices, many of which have started pegging lower Lows on the long-term trend – e.g. see the S&P500 (SPX), the NYSE Composite (NYA), or the Russell 2000 (ITM):
Merely the NASDAQ Composite (COMP) has not done so, but is within immediate earshot of making lower Lows:
Volume in the selloff was raised but not massive. Still, technically, distribution showed up, and was appreciable all across almost all market segments. The related European markets have shown equally started showing signs of confirming the likely start of a new down-trend, as e.g. seen on the SPEU:
As for the whole duration of the selloff starting in July, dip-buying in the large-caps, specifically the mega-8-caps, has been masking the rout seen in mid-, small- and microcap segments, which all registered much more radical selling.
Defensives and energy lead
There has been marked weakness in previously-leading cyclicals such as homebuilders (e.g. XHB) or transports (e.g DJT), and also in the ever-bullish semi-conductors (e.g. XSD). Not that all of these were exciting groups in the first place, nonetheless they added to the breadth of the rally. As of the last few weeks, they have in line with the popular indices started making lower Lows again, likely signaling a new down-trend starting at least in the intermediate-term:
Defensive groups, specifically healthcare including generics manufacturers (e.g. MCK), large biopharma (e.g. LLY), and insurances (e.g. MMC, AJG) have attracted capital inflows, underscoring the hostility of this market environment:
Meanwhile, oil (e.g. West Texas intermediate crude WTI) has started turning up in the intermediate-term trend and might soon be challenging its long-term down-trend:
This in turn has led to a host of oil & gas stocks wiggling up, however strong moves into new-high price discovery are still rare, and price-action not ideal. Resource stocks will trade differently from more virile growth stocks, however conviction should be appreciable if this is supposed to become anymore than a short-covering rally.
Observe for example VIST price-action – no volume nor clean price action can be observed at a pivot price point above a neat digestion. This thinly traded stock is of course not representative of the whole O&G sector, however such price action is not confined to VIST – for example, the much larger SLB cannot attract follow-through buying volume near new high prices either.
So far, participation in a potential O&G rally is weak – it is for sure a leading sector, but that means little if stocks don’t move out reliably.
More topping signs in the better-quality leaders
Considering the picture across the board, price action has further deteriorated in the higher-quality segment of the market, which of course is probably the biggest nail in the coffin of this rally since months.
Observe rejection of new High price, erratic action, high-volume-, steep-angle selling, or lower Lows made on the charts of IOT, SMCI, CELH, ACLS, PSTG, ANET, or ELF. This is pretty much anything you need to see to know that this market is not a benign environment:
Also check out one of the latest FOMO stocks of the AI rally, IONQ – it is selling off under high volatility, suggesting capitulation of the few idiotic holders that most likely bought right into the top between 15-20$:
As the leaders go, so goes the market.
The popular indices appear to be in the process of rolling over in the long-term trend, while leaders are showing bad price action and capital is flowing into defensive groups.
The market remains a chop-fest that is hostile to anyone trying to trade in strong trends. Harvesting volatility with options trading and scalping still work here – but anything else should be attempted with great care.
So long,
TGS