Momentum Monday – Slow-motion Selling

MarketSmith powers the charts in this video.

We saw more distribution days last week. Most stocks went down via gradual, slow-motion selling. We haven’t really witnessed any panic selling that tends to mark short-term bottoms. Market breadth reached oversold levels last Friday. Most stocks gapped down on Friday after being down several days in a row. As expected, that gap faded. The fact that the indexes are in a correction is now evident to everyone. More people are turning bearish which means that we might see a quick bounce to shake out all the bearishness. 

If this is just a garden-variety correction within a bull market (which I believe it is), it makes sense to compare it to what happened in February/March of this year. That pullback started just when the market became a bit euphoric after a big run in January. The correction had two legs lower intercepted by a big bounce towards SPY’s 20dma. On the first leg lower, almost all stocks got hit. Then most had a big 3-day bounce to their 20-day moving average. During the second leg lower, some stocks (especially in tech) went sideways, showing relative strength. The moment the correction was over and the indexes bounced, those tech stocks outperformed significantly. I am not saying that this is the way the current correction will play out and what the duration of which leg will be, but it is a decent map to keep in mind. A notable difference this time is that all major indexes are below their 50-day moving average. QQQ never closed below its 50dma back in March. 

Nvidia (NVDA) reports earnings on Wednesday afternoon. It has been the biggest leader so far in 2023. My guess is that this bull market won’t be over until NVDA is hit hard which is not very likely to happen at this point in time. The last time Nvidia reported, on May 24th, they crushed estimates, raised guidance and kick-started a big rally in the tech sector. The stock is up 200% year-to-date so a lot of the good news might be already discounted in its price. Every momentum investor owns it, so any significant dip is likely to get initially bought. If it gaps up, I would not be surprised to see it fade as people rush to take partial short-term profits.

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