Poor Breadth, Fading Rotation Reveal Messy Market
The indexes held up reasonably well, but the action under the stock market surface is more concerning.
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The market action on Wednesday, following headlines about a renewed conflict in Iran, was poor but not terrible. The index losses were relatively mild, and if you looked only at the closing numbers, you might conclude it was a routine day of digestion, with the Nasdaq closing near flat and the Nasdaq 100 (QQQ) positive.
The problem was under the surface. Breadth came in around 31% positive, and new lows of 175 exceeded new highs of 71. That reversal in the high and low counts is notable because it shows that the rotation trade, which has been the main driver of positive action lately, faded on Wednesday.
Rotation Takes a Rest
For a while now, the small caps, biotechnology and other laggard groups have been doing the heavy lifting while the big-cap technology names and chip stocks have stumbled around. When that leadership takes a rest and nothing steps up to replace it, we end up with days like this one, where the indexes mask the fact that most stocks are down.
It wasn’t a terrible day for the broad market, but it was my biggest pullback in a while due to the pressure in biotechnology. I’ve been expecting it to hit and that is why I have plenty of cash on hand.
A group that has run as well as biotechnology has recently does not keep going straight up, and I view this as healthy consolidation that will improve the charts. The names that hold support and build new bases on this pullback are the ones that will lead when the group reasserts itself. The ones that break down will tell us where the froth was being chased.
Transitional Market
The bigger picture is that we are now in a transitional period. The mechanical action around index rebalancing and the recent IPO flows are in the rearview mirror, the rotation has cooled, and there isn’t an obvious catalyst to fill the gap until earnings season arrives. Markets in this position tend to drift and churn, and the news flow, whether it is Iran or bonds or the endless debate over AI profitability, gets more attention than it deserves because there is nothing else to trade against.
Game Plan
My approach has not changed. I trimmed very little into Wednesday’s weakness because the pullback in my biotechnology names is within normal bounds, but I’m watching my support levels closely and will cut anything that fails to hold. I’m keeping plenty of cash ready for better entry points, and I’m starting to build my earnings season watch list, since the reports will give us the fresh fundamental news this market is lacking. If you are so inclined, this is a good time to do the same homework. Identify the names you want to own, decide the levels where you want to own them, and let this consolidation come to you.
Choppy transitions like this one are where patience gets rewarded. The setups that emerge from this digestion will be better than the ones we had a week ago. Don’t waste too much time listening to the prognosticators. The best move is to just wait and see how things develop.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
