Key Notes & Observations (Thursday)
Disclaimer: this is not a forecast, but a discussion of ideal scenarios — based on prior patterns and a study of history.
A mere two weeks after they topped, SOX and NDX are on the verge of erasing HALF their YTD gains.
“What happens on the other side of a melt-up? Answer: things that were considered mathematically impossible, begin to happen regularly.” (July 12 note)
Even a small residual decline to test their respective 100dmas (a standard support area) would officially wipe out half the YTD performance of these leading indexes.
Two-week losses of this magnitude are infrequent — another indication of the fragility of markets here.
Even the rotation areas plunged yesterday — confirming the exhaustion signals discussed last week.
These are staggering relative and absolute performance losses.
WHAT’S NEXT?
Near-Term:
A number of my indicators are approaching near-term oversold conditions, which we'll cover in detail in the upcoming Weekly Review.
If/when confirmed, historical patterns suggest a meaningful bounce should begin by month-end and last several weeks into August.
As conditions develop, we’ll focus on the key signals in real-time and publish them on this research page to subscribers.
Intermediate-Term:
Big picture, this is a classic Momentum unwind, with several months left in the year — an eternity in markets.
NDX is tracking at nearly 2 Beta to S&P.
SOX is tracking over 3 Beta to S&P.
S&P is only down 4.4% from the highs, entering weak Q3 seasonality in a typically volatile election year.
Therefore it's not a stretch by any means… to think that even a standard (for example) S&P pullback to ~5100 key support —a normal 10% peak-to-trough correction— could lead to severe additional losses for High-Beta Momentum.
I think the most important thing over the next weeks will be to measure the quality and extent of a potential bounce in key markets, and IF such a bounce fails. Not just how Equities develop, but also Rates and even more so, Currencies.
There are ways to approach this, and I'll be covering them as we go.
IF a bounce eventually fails, imagine what happens to (still) crowded positions if markets extend their Intermediate-term correction —and Momentum leaders continue to unwind into later Q3— further testing the resolve of trapped buyers.
Hard decisions will have to be made.
Thanks for reading.
Your notes for the last 3 weeks on gold and silver were incredible. Spot on.. thank you
These short daily notes have been really helpfull in navigating these complex markets. Thanks!