120 New Lows Send a Quiet Warning With Market Still Near Record Levels
Semiconductors and small-caps struggle while the new-low list keeps growing. This is how a two-tiered market acts under stress.
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It was a day of profit-taking, consolidation, and rest after a parabolic run for a small group of stocks. The S&P 500 finished modestly lower, the Nasdaq was down a fraction, and the Dow gave back about 310 points after touching 50,000 intraday for the first time since February.
Breadth ran around 38% positive, which is poor, and the new 12-month low list expanded to about 120 names even though the indexes remain very close to all-time highs. Oil bounced modestly off its lows as investors not-so-patiently await developments in Iran.
This kind of session after the recent action should not surprise anyone. After eight up weeks out of nine, a record close on Wednesday, and a parabolic move in semiconductors, the market needed to digest. The question to ponder is what kind of digestion this will be.
Sell-the-News Was the Dominant Pattern
The earnings reactions today told the same story we have been watching all season. Datadog (DDOG) was up around 28% on a clean beat-and-raise, with full-year revenue guidance of $4.30 billion-$4.34 billion well ahead of the $4.09 billion consensus. That is what happens when a company materially exceeds expectations even when there are some questions about valuation.
At the opposite end was non-technology names like McDonald’s (MCD), which beat on earnings and traded to its lowest level in over a year. The pattern of selling stocks that report good numbers but are perceived as either extended or carrying weakening forward setups is now firmly entrenched.
As I discussed previously, Goldman Sachs reported that the median stock beating EPS estimates has outperformed the S&P 500 by only about 20 basis points on the day after reporting, one of the smallest reactions on record. Today the pattern showed up again in less obvious names.
Strong earnings beats are not sufficient at this juncture. Guidance has to be increased to justify the valuation or the stock takes a hit.
The 120 New Lows Number Is Notable
The single most interesting data point on a day like this is the new-low count. With the S&P 500 still within striking distance of its all-time high, more than 120 names hit fresh 12-month lows Thursday. That is the same divergence I discussed Wednesday and it is intensifying rather than resolving.
This is how a two-tiered market acts when under stress. The cap-weighted index can stay near highs because a handful of mega-caps are doing the heavy lifting, while a meaningful slice of the S&P 500 components keeps drifting lower. Profit-taking days do not narrow that gap. They tend to widen it, because the names that have been working sell off on profit-taking, and the names that have not been working sell off on broader weakness.
The Rotation Thesis Got a Reality Check
This morning I noted that the key question we need to ask is whether the two-tiered market would resolve through rotation or through a broad selloff. The trigger to watch was what happened when the chip group had its first real down day. Today the chip group cooled. Micron Technology (MU), Broadcom (AVGO), and several of the parabolic names from the past two weeks were down meaningfully.
The response was not the sort of rotation I would like to see. The Russell 2000 also went down, breadth deteriorated to 38%, and the new-low list expanded. That is more consistent with the broad selloff scenario than the rotation scenario, at least on this one day. There is not enough data yet for this to be meaningful, but if we do not see dip buyers in the secondary names it will be a concern.
Friday Brings Payrolls
The April nonfarm payrolls report is out before the bell on Friday. After a week dominated by Iran headlines and earnings, the macro data finally gets a turn in the spotlight.
A hot number complicates the Fed picture. A soft number revives the easing narrative. Either way, the reaction will tell us more about positioning than about the underlying economy.
My Game Plan
The plan does not change because of one consolidation day. The chip leaders are extended, the sell-the-news pattern is intact, and the new-low list deserves consideration. None of that argues for piling into the indexes or chasing the parabolic moves. It also does not argue for shorting, for the reasons I covered at midday.
I am still focused on individual stocks. Xeris Biopharma (XERS) held its gains today after this morning’s report, which is the kind of action I want to see. The names with clean charts and underlying fundamentals continue to be where the opportunities are.
I am letting the indexes sort themselves out and watching the equal-weight S&P 500 (RSP) for confirmation that rotational action will gain traction.
Have a good evening. I’ll see you Friday.
At the time of publication, Rev Shark was long XERS.
