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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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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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The rating agency Fitch downgraded the US credit a notch. The US government is not considered a risk-free borrower anymore. The move rattled financial markets and potentially started a correction. Will we see a similar story to 2011 when Standart & Poor’s stripped the US from its AAA rating? Back then, the stock market was in free fall weeks ahead of the rating drop. The difference this time is that the main US indexes were within 5% of their all-time highs before the news hit the wire. Back in 2011, capital flowed to the perceived safety of treasuries. This time around, Treasuries were hammered before and after the rating announcement. Why do I even mention the US credit here? Last year, Treasuries and Nasdaq 100 were highly positively correlated. They moved together, hand and hand. This year, we saw a big divergence. Most tech stocks have managed to rally significantly in the face of rising interest rates. Can this divergence continue longer has been a question I asked for a few weeks now and the answer so far has been – yes. There are two main reasons for that:

1. The market doesn’t believe interest rates will continue to rise because inflation expectations have been declining. 
2. Tech earnings continue to beat estimates by a significant margin on many occasions. All the cost-cutting that big tech companies did late last and early this year went to their bottom line. The market anticipated that and has been bidding them 6-9 months in advance.

I believe we are still in a bull market but we are currently in a pullback, choppy, range-bound mode that can last through August and September. I wouldn’t be surprised to see QQQ and SPY testing their 50 or even their 100-day moving average in the next few weeks. For me, this means focusing on short-term setups, trading less, and using a smaller position size so I limit any drawdown and frustration and be better prepared for the next trending market which is probably just around the corner.

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