Mid-week market update: Is the correction over? The S&P 500 was down -3% on a peak-to-trough basis. The 5-day RSI is severely oversold, which has signaled relief rallies in the past (blue circles). On the other hand, the percentage of stocks above their 20 dma is not oversold, which have been more definitive signals of durable bottoms (pink vertical lines). As well the NYSE net highs-lows is showing both a series of higher lows and lower highs.
Trading is hard. My head hurts.
Here are the bull and bear cases to consider.
The bull case
Let’s start with the bull case, the Fear & Greed Index has fallen to levels consistent with tactical bottoms in the past year.
Jim Paulsen observed that Trump has dramatically increased economic uncertainty, which is contrarian bullish.
In the past, such episodes have tended to resolve bullishly.
In addition, Steve Suttmeier at BoA pointed out that year 1 seasonality calls for a weak February and a rebound in March. The market’s seasonal headwinds should start to diminish next week.
The case for a deeper correction
Here is the case for a deeper correction. Goldman Sachs pointed out that retail investors have been piling into the stock market recently, with the flows concentrated in the technology names.
Goldman strategists have called for traders to fade the retail stampede. Indeed, the latest market downdraft appears to be a price momentum unwind, which may not be complete just yet.
In addition, Commodity Trading Advisors (CTAs) are projected to be selling equities under every scenario over the coming weeks and month.
Investors and traders will also have to contend with the NVIDIA earnings report, which is scheduled for after the market close today. I have no idea of what their results will be, but a TD Cowen research report surfaced on the weekend which reported that Microsoft had canceled contracts for data centre leases. This is a potentially ominous development for the expected growth rate of the hyperscalers and could be the first crack in the AI bullish thesis.
Tail-risks
As well, the tail-risks that I identified on the weekend remain in play. Bitcoin, which is a real-time proxy for banking system liquidity, has violated a key support level. The relative performance of ARK Investment (ARKK), which represents speculative growth stocks, has broken down too.
The USDJPY exchange rate is hovering just below the psychologically important support level of 150. The combination of rising JGB yields and falling UST yields have the potential to set off another Yen carry trade unwind risk-off stampede.
The verdict
What the verdict? The market is short-term oversold and due for a bounce. I would prefer to wait and see how it behaves after the initial relief rally before rendering a bull or bear decision.
For what it’s worth, only one of the components of my bottom spotting model flashed a buy signal during the latest downdraft. The VIX Index spiked above its Bollinger Band, which is an oversold signal. The term structure of the VIX neared an inversion, indicating fear, but never reached those levels on a closing basis.
My personal inclination is to call any bounce a dead-cat bounce and postulate a deeper correction, but it’s not a high conviction call. My inner trader is remaining on the sidelines and unwilling to take a position ahead of what is essentially a coin flip on NVIDIA. In addition, Trump outbursts like the one today about slapping a 25% tariff on the EU is a reminder that sudden bursts of volatility are always lurking below the surface.
Thank you for putting those pieces of technical analysis together Cam. This President had a rep for making unprecedented moves. Everyday there are new headlines of Federal workers being cut and offices closed. This will work its way into the unemployment numbers and strain on State expenses. The smell of fear isn’t just on wall street, not to mention the start of legal and illegal immigrant round ups.