Follow-Through Day Without Much to Buy
Chips jumped 5% and the indexes likely flashed a buy signal, but more stocks hit new lows than new highs.
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CoreWeave’s (CRWV) earnings and an oversold Nvidia (NVDA) triggered a bounce in AI stocks on Wednesday. The chips gained about 5% and the Invesco QQQ Trust (QQQ) rose 2.4%. The rest of the market didn’t keep up. The Roundhill Magnificent Seven ETF (MAGS) gained just 0.6%, and breadth was mediocre, with about 57% of stocks advancing.
This likely qualifies as a follow-through day under the Investor’s Business Daily definition, which requires a sizable index gain on higher volume on the fourth day or later of a rally attempt. That is the signal IBD uses to confirm a new uptrend, and it is the signal I said on Tuesday we needed to see.
Where Are the New Highs?
There were only 126 new highs on a day when the QQQ gained more than 2%, and there were 180 new lows. When a sustainable uptrend begins, stocks break out to new highs along with the indexes. On Wednesday, the buying went into stocks that are down 50% or more from their highs.
One money manager who follows the IBD method made the same point. He noted that when the market produced a follow-through day in April, a couple of dozen chip and memory stocks broke out at the same time. On Wednesday, he said, “there are only a handful of stocks near or at new highs.” He sees a relief rally in crushed AI stocks, buoyed by CoreWeave, and he is more inclined to short the bounce in the former leaders than to chase it. He is making only a tentative move because he is “more focused on preserving capital than missing a couple of day bounce.”
I see it the same way. I also see little new merchandise to buy. Much of today’s move was positioning and short covering again, and as we have seen over the past week, that kind of buying produces more volatility, not a sustained trend. Monday’s big rally was followed by Tuesday’s reversal for the same reason.
Follow-through days fail often, and the quality of the stocks leading them is the best way to tell the good ones from the bad. If this rally has legs, the proof will come over the next several days as new stocks set up and break out. If the only things going up are broken stocks bouncing off their lows, it won’t last.
Game Plan
The market forgot about interest rates on Wednesday, but that may be because the bond market was closed for Veterans Day. On Tuesday, the 10-year treasury yield briefly topped 5% and stocks stumbled. Today there were no yields to watch, and the AI names rallied as if the problem had gone away. Bonds reopen Thursday with a 30-year auction, and the producer price index is due on Friday. If yields pick up where they left off, this bounce gets its first test.
I’m staying with high cash and watching for stocks showing relative strength rather than chasing the names that were crushed. If more buyable charts show up in the coming days, I’ll put money to work quickly. I’m not going to do it on the strength of one day of short covering.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
