Dip Buyers Can’t Stave Off Ugly Finish as Stocks Head for Disappointment

Following an ugly start on Tuesday, the dip buyers managed a decent bounce, but it failed to hold, and the finish was weak. It was not a close at the lows, but there is obviously some concern about holding positions overnight.

The conventional wisdom is that the closing action reflects “smart money.” Institutions make their moves at the close, and in strong markets, they tend to be buyers, so that is a regular feature of uptrends. The so-called “dumb” money which tends to be retail buyers is more likely to make its move at the open. So, in this case, both retail and institutional money were sellers, while traders drove things up during the middle of the day and then bailed out.

Breadth finished poorly at about 34% positive, and new 12-month lows at 250 were twice the number of new highs at 125. The Magnificent Seven and small caps were the laggards, each losing more than 1%. That isn’t action that hints at a quick turn to the upside.

Two Events That Decide the Next Move

This is pretty typical corrective action so far, but the more important issue is whether we gain some downside momentum. There are two big events that will need to be addressed before that happens. The first is Nvidia (NVDA) earnings after the close on Wednesday, and the second is some progress in the Iran situation.

I am concerned that these two events will produce bounces that will be sold. I know that is a pessimistic take, but the likelihood that either event will produce sustained upside at this point appears remote, especially given the need to battle both negative seasonality and upside pressure on interest rates.

The interest rate issue is the most consequential factor right now, and the uptrend looks to be gaining traction. If there is some progress in Iran and oil prices come down, that will help, but there are structural issues now pressuring bonds that may keep them sticky to the downside.

Strategy

My game plan continues to be heavy cash and some short-term trading when we are too stretched to the downside. Any longer-term buys are small at this point. I would like to be more positive, but this market will require some defensive action and patience. There are some good opportunities developing but they will like take quite a while before we can risk precious capital. 

Have a good evening. I’ll see you tomorrow.

At the time of publication, DePorre was long NVDA.