Key Stock Group Forms Double Top as Market Character Shifts
The most notable shift was increased chatter that the market might be due for a rest.
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It was a poor day for equities on Wednesday, with all the indices losing ground and only 27% of stocks in positive territory. The Russell 2000 (IWM) was the big loser at 1.4%, and new lows (193) exceeded new highs (164). New highs have been running about two-to-one over lows in the last few sessions, but shifted very quickly in this session, illustrating how bifurcated market action has been.
The Magnificent Seven (MAGS) has been struggling, and after Wednesday’s action, there is a double top on the chart and a low close since May 5. Semiconductors (SMH) attracted dip buyers and are still a safe haven for traders that are chasing relative strength but leadership is very narrow.
The most notable shift was increased chatter that the market might be due for a rest. That is based on anecdotal evidence, but it is the first day in a while where I’ve heard a little more caution among bullish traders who have been chasing momentum.
Iran Pushes into Labor Day Territory
One catalyst for the shift is that investors are losing hope of positive news about Iran. When asked whether the blockade of the Strait of Hormuz could still be in place by Labor Day, President Trump said he thought it was “unlikely” but did not rule it out. The very mention of Labor Day puts a two-month timeline into play, and that is a long summer of uncertainty if things drag out.
Both oil and interest rates rose on Wednesday amid those worries. The economic ramifications of high oil prices for an extended period is becoming more worrisome and the inflation issue is not going away.
Dip Buyers Are Stepping Back
Just about everyone agrees that some areas of the market need a rest and the lack of late dip buyers is a sign that they may finally be acting on that worry. I see some bidless action and a hesitance to buy dips is an indication that the character of the market is shifting.
Strategy
I took a few stop-outs and reduced some positions during the day which puts my cash levels at around 38%. That isn’t as high as I’d like but I’m keeping stops tight and may increase it fairly fast.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
