Momentum Monday – Under Pressure

MarketSmith powers the charts in this video.

If inflation expectations are diminishing then why are interest rates still rising? The 10-year yield is close to multi-year highs. I don’t know if rates are the reason for the recent weakness in tech stocks. It would make sense but they didn’t have a big impact for most of 2023 as big tech stocks had a substantial recovery. What matters is that the number of distribution days in the Nasdaq 100 has quickly increased in the past couple of weeks. QQQ sliced below its 50-day moving average without having the typical at least one-day bounce near that level. We saw a similar price action in many of the 2023 leaders like NVDA, MSFT, NFLX, SMH. Everyone who waited for those stocks to pull back so they can buy the dip suddenly doesn’t want to buy them anymore; either that or selling is overwhelming any buying attempts.

The Nasdaq 100 is down less than 6% from its 52-week highs; the S&P 500 is down 3%. In the meantime, many high-momentum, high-beta stocks are down between 10 and 50%. Imagine what would happen if the indexes continue their pullback in August and September and drop 10-15%. The current earnings season has been a wake-up call for many of those high fliers. They went up significantly ahead of their earnings and came crashing down after them.

The one area of the market that has continued to thrive is the so-called cash cow stocks of companies that produce high free cash flow. The ETF COWZ is near all-time highs. It helps that the energy sector accounts for 35% of the ETF. eight of its top ten holdings are energy stocks – CVX, MRO, VLO, EOG, PSX, PXD, LNG, FANG. Not the sexiest and fast-moving stocks but energy (XLE) is the one sector that is still above its 10 and 20-day moving averages. Healthcare (XLV) is there too.

Choppiness and indecision are normal during earnings season. Add to it the seasonally weak August, September, and October in a pre-election year and one should not be overly surprised by the weakness in many tech names. The overall bull market is still intact but it is currently in a correction, choppy mode. Declining markets require a different approach than rising markets if you want to keep your profits from earlier this year. Some of the helpful moves are reducing position size, trading less in general if you swing trade, and being extra nimble on your intraday undertakings. The good news is that the best swing and position trade entries always come after a correction. The deeper the correction, the better the opportunities afterward. Corrections should make you smile, not worry. 

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