Regime Change?

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Considering that equity markets in the US got hit hard this week with the NASDAQ 100 giving up most of its gains for the year (down over 7% over the past 30 days) and now only up +1.25 % for the year, the question is what does that portend going forward? And of course, the question of what is happening and why? There are multiple factors that need to be considered.

First, the AI revolution that has driven the magnificent 7 and equities through the roof got way ahead of itself with a blow-off top in early March this year. A bearish engulfing pattern in Semis and NVDA occurred at all-time highs in both and was the clue that the huge rally might be ending.  However,  it took over a month for the market to confirm that the bearish short-term pattern was legit. NVDA has been a key driver of the move up in equities, moving from just above 100 in October 2022 to 970 by March 2024. One thing for sure is risk management is key in this environment and our trading models sold a portion of its holdings at 960. By the close this Friday, NVDA backed off 10% on the day, closing at 760.

Also, it’s important to note that the action in gold and silver confirmed that a potential top was in as well. Gold exploded to the upside, breaking out to new all-time highs and up almost 15% since March. Typically, gold does not like higher interest rates and  a strong dollar. Nonetheless, Gold's move up shocked many professionals. So, Gold’s sensitivity to geopolitical risk superseded its sensitivity to higher interest rates and a strong dollar, which was yet another clue that the market’s bull run might be running out of steam.

Additionally, soft commodities have also moved up sharply (food prices are exploding), driving inflation up and wreaking havoc on the markets’ expectations of lower rates. Our GEMS trading model has capitalized on these shifts and is outperforming all key benchmarks, moving out of equities into GLD, Silver, DBA, and exiting Semis.

The big takeaway, at least for now, is that value stocks (VTV) are now leading growth stocks for the first time since June 2022, according to our leadership indicator, both on a daily and weekly basis.

On a final note, Mish’s Daily covers some especially important rotations within the Modern Family, Bitcoin, and Junk Bonds with actionable information.

Click here to read about this important sector rotation in Mish’s Daily

 

 

 

Risk-On

• Despite the continued selloff, Market Internals measured by the McClellan Oscillator recovered for both the S&P500 and Nasdaq Composite. (+)
• 5 of the 6 members of Mish’s Modern Family were up on Friday despite Semiconductors having broken down hard and being in a Warning phase. At the same time, Regional Banks (KRE) recovered back above both its long-term 200-day moving average as well as its shorter 10-day moving average. (+)

Risk-Off

• All 4 key US indices have now broken down and closed below their key 50-day moving averages, and over the last week, the Nasdaq (QQQ) got slaughtered and is now barely up for the year. (-)
• Volume patterns show far more distribution days over the past 2 weeks amongst the key US indices. (-)
• Cash came flooding into risk-off sectors this week such as Consumer Staples (XLP) and Utilities (XLU) while speculative sectors such as Tech (XLK) got hit the hardest. (-)
• Metals and Soft Commodities (DBA) continue to lead the market as equities tumble. (-)
• The New High / New Low ratio remains stacked and sloped negatively and also appears to have more potential room for the downside. (-)
• Risk Gauges deteriorated further to Risk-Off. (-)
• There was a major breakout this week for Value (VTV) which is now outperforming Growth (VUG) on a short and long-term basis. (-)

Neutral

• Cash Volatility ($VIX.X) exploded but short-term volatility (VIXY) didn’t take out its recent highs. (=)
• Even with a selloff on Friday, there were improvements across the board regarding the number of stocks above key moving averages. (=)
• The long bond (TLT) looks deeply oversold short-term and is in the process of mean reverting. (=)
• Foreign Equities (EEM & EFA) held up much better than US equities are are now outperforming the US on a short-term basis. (=)
• Soft Commodities (DBA) and Gold (GLD) held up well with food prices exploding to upside  while Copper (COPX) and Oil (USO) sold off. (=)