Weekly Update: The Sell-Off Continues
Good evening, and welcome to this week’s edition of Stealth Trades!
The market continued its sell-off this week. The major indexes fell roughly 3% on steady selling over the last four days.
I commented last week that “leadership was failing.” The big-cap names that had been leading this rally were rolling over one-by-one. Apple (AAPL), Nvidia (NVDA), Super Micro (SMCI), MongoDB (MDB), Broadcom (AVGO) and several others had breached their 50-day moving averages and failed to bounce.
This week, the graveyard got bigger. Micron Technology (MU), Palantir (PLTR), On Holdings (ONON) and even Bitcoin joined the ranks of broken leaders.
Even Alphabet (GOOG), which has arguably been the strongest name during this pullback, is beginning to give up ground and break the low of its base.
None of this is reassuring. What started as a shallow retracement is quickly becoming a full-blown failure in growth stocks.
The culprit? Take your pick.
Some say the rise in 10-year bond yields is to blame. Others are pointing their finger at China and the real estate bubble bursting over there.
I even read an article this morning saying the sell-off to excess trading activity in zero-day-to-expiration stock options (commonly referred to as 0DTE options) was forcing market makers to rapidly sell equities in order to remain market neutral and hedge their bets.
At the end of the day, it doesn’t really matter why stocks are falling. All that matters is they are.
The stock market is always in one of three states – an uptrend, a downtrend, or range bound chop.
Below is a weekly chart of the Nasdaq for the last three years highlighting the fluctuations between uptrends, downtrends, and sideways action.
As you can see, there were a few periods of beautiful trending action. I call these “power trends” and this is where the most money is made.
Market conditions will not be good at all times. In fact, most studies I’ve seen estimate that stocks only trend roughly 30% of the time.
Our job, therefore, is to identify these trends as soon as possible and press firmly on the gas.
We did that in May and June. And the results were phenomenal. We bought stocks like NKLA which went up 87% in 2 days, COIN which soared 46% in 7 days, HIVE climbed 51% in 15 days, NIO surged 44% in 23 days, and at least half a dozen other blockbuster wins.
All of these trades took place in that last green box on the chart.
That uptrend, however, is over. At least for right now. I expect to see another start within the next 4-6 weeks. Until then, we want to protect our hard-earned gains.
There are a few things I watch as clues that a new rally is about to begin. One of them is the Net New Highs/Lows.
The indicator in the middle of the chart below takes the net new highs (how many stocks made new highs that day) and subtracts the number of stocks that made new lows. If that number is positive, it paints a green bar. Red bars mean the opposite.
In almost every good trend, the market has more stocks that will be making new highs than new lows on balance. This also tells me there is broad participation underneath the surface.
As you can see, the indicator began painting green in mid-May, right as the new uptrend was getting underway.
For the last 11 trading days, however, we have seen more net lows. When the market bottoms here and finds its footing, we should see that trend reverse.
Another thing I like to watch is the Put/Call Ratio. In TradingView, you can plot this on a chart using the ticker symbol “PC.”
Most option traders lose money. They get bullish and buy calls when the market is at its highs, and they usually buy puts right as the market is bottoming.
This is known as a contra-indicator. If everyone thinks the market is heading lower, it’s probably about to rally.
I look for a reading of 1.20 or better during short-term pullbacks as a sign we could be at the low. And a reading of 1.40 or higher is a screaming buy signal for me.
Notice the huge spike at the end of 2022. This is one of the key indicators that had me shouting from the rooftops that this was a new bull market.
Long-term, I am still bullish. Based on what I am seeing, I expect this to be nothing more than a bull market retracement.
Once buyers step in, there will likely be a choppy tug-of-war in the markets for 4-6 weeks followed by a new rally as the bull market resumes its trajectory.
Until then, I encourage traders to be cautious. Trade small, if at all, until you start seeing progress in your trades.
Given the uncertain environment, I will refrain from giving specific trade ideas like I usually do in these weekly updates. But I will tell you where I am seeing strength right now, and a few stocks to keep an eye on as the market finds its footing.
The areas holding up the best are construction and energy.
For construction, this includes home builders like Dream Finders Homes (DFH), Toll Brothers (TOL) and M/I Homes (MHO) as well as manufacturers of building products like Simpson (SSD) and Apogee (AGOP). If these continue to hold up throughout this pullback, look for them to make new highs as soon as the market begins turning back up.
In the energy sector, particularly the offshore space, I like Tidewater (TDW), Archrock (AROC), and DHT Holdings (DHT).
I suggest keeping these stocks on your watchlist as potential new buys.
Best wishes for your trading,
