Don’t Trust Bounces as a Turning Point Continues to Develop
Here is my strategy for navigating this difficult market.
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The indexes are lower on Tuesday morning, with the Nasdaq 100 (QQQ) leading the way, down 0.7%. Bonds remain the villain as interest rates and oil prices rise. There is not much fresh news flow, but quiet news does not mean a dull market. With no significant news to trade, the focus is shifting to positioning ahead of the next big catalyst, while macro issues are creating a downside bias.
The reason the mega-cap names are soft has nothing to do with a new headline. It is the impact of the discount rate at work. The 30-year Treasury is at its highest level since 2007 and the 10-year pushed above 4.60% on Monday. When the long end of the yield curve is at a two-decade high, the most extended part of the market is repriced first, and that is the Magnificent Seven and the semiconductors.
This is also not just a U.S. story. The 30-year gilt in the U.K. is at levels not seen since the late 1990s and long-dated Japanese yields are at multi-decade highs. A global bond rout is harder to fade than a domestic one, and that is part of why the pressure is more persistent rather than just a one-day event that can be ignored.
The TACO Trade Has Lost Its Bite
President Trump’s delay of an attack on Iran at the request of Middle East leaders had minimal effect on the market this time, and that illustrates that the TACO trade has lost its bite. A delay is not a resolution, though. The market sees the situation dragging out longer with no clear resolution in sight, and the truce has been described as on life support rather than on a path to an end.
Something significant will happen in Iran soon, which will likely give the market a bounce. The more important question is whether the end of the war accelerates the turning point that appears to be building or instead sets up a new leg higher.
The end of the Iran situation has been so well anticipated for so long now that it is more likely to be a sell-the-news event than an extended celebration, but we will have to wait and see how things develop. The longer it stays unresolved, the more folks who have been waiting to sell strength get backed up, and the more anxious that crowd becomes to be bailed out by good news that may not produce the rally they expect.
Nvidia Is the Gravity
The other big event coming is Nvidia (NVDA) earnings after the close on Wednesday. Nvidia has replaced Apple (AAPL) as the most important stock in the market, and the bar for it to run higher is high.
Nvidia stock has declined on the day of its earnings release in three of the last four quarterly reports, and every one of those was a beat. A strong number is already in the price, and the China angle that lifted the stock on Trump’s recent trip has been recast as a negative.
With no catalyst in front of the print, the path of least resistance is anticipatory de-risking. It looks like the market is already positioning for that Tuesday morning, with softness in semiconductors and the Mag 7 names.
Strategy
The market is struggling with a potential turning point, and it is likely to be a bumpy ride from here. Tops are typically not a single point but a wave of volatility with countertrend moves that hand the bulls some last-minute hope. That is exactly why this is a moment to react rather than anticipate. The character of the market has shifted, the evidence is broad, and the correct approach is to respect the price action rather than argue with it.
Stay focused on the price action and do not be too trusting of bounce action at this point. Bounces will be of shorter duration if we are at an actual turning point. If the bulls are trapped chasing failed bounces, the ensuing pullbacks are likely to gain more traction because trapped longs become forced sellers on the next leg down.
My game plan is to stay at high cash levels, close to 50% right now. I am watching some favorite names that are acting poorly and will slowly accumulate, but I have to make sure I do not move too fast and keep incremental buying small. There is no rush. If these names sink further and become oversold, they set up as better entries than they are today, and a high cash level is what gives me the flexibility to act when that happens rather than wish I could.
I am gaining confidence that we are entering a choppy and disappointing market environment, and it will require strong defense and select stock picking to navigate it effectively. Treat this market like a major shift is coming rather than just some momentary weakness.
At the time of publication, Rev Shark was long NVDA.
