Seasonal Slowdown Finally Arrives
The negative seasonality I have been anticipating finally kicked in on Tuesday.
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The S&P 500 (SPY) fell about 0.7%, and the Nasdaq 100 (QQQ) lagged badly with a drop of 1.7% on Tuesday. We closed near the day’s lows, which is the pattern I said I was watching for to signal further downside. Breadth slipped through most of the session and finished around 37% positive.
What is most notable is the disinterest and lack of energy, rather than any rush to sell. This was not a session where buyers panicked and hit bids. It was one where they simply did not show up. Volume was thin, the bounces were half-hearted, and nobody seemed to have much conviction in either direction.
Bonds bounced back a bit on Thursday after a rough stretch, but the concerns about interest rates gave folks a good excuse to move to the sidelines in the waning days of summer. When the reason to stay engaged is thin, and the reason to step away is easy to articulate, most people step away. That is how August ends.
Chips Give it All Back
Semiconductors reversed sharply, down around 4%, after acting Monday like they did not have a worry in the world. That is a substantial one-day round trip in the group that has been carrying the indices. Monday, the money rotating into chips came out of everything else and made the tape look better than it was. On Tuesday, the chips gave back the gain and there was nothing on the other side to absorb it, which is why the Nasdaq took more than twice the damage of the S&P.
The rotation only protects you when there is somewhere for the money to go. When the leadership group reverses and the money that funded it has already left the other groups, you get a session like this one.
More New Lows Than Highs Near a Record
New 12-month lows exceeded new highs by roughly 150 to 130. It is remarkable to have more new lows than new highs when the senior indices are still this close to all-time highs. That combination should not happen in a healthy advance. In a market with solid breadth, an index near a record produces hundreds of individual stocks doing the same thing.
It is a function of the rotational action that has defined this entire year. This has not been a broad market in either direction, and leadership has not been concentrated the way it was when the Magnificent Seven were large and in charge. Money keeps moving from group to group without ever committing, which produces index-level records and an average stock going nowhere.
That is why the index level has been such a poor guide for anyone picking individual stocks. If you have been reading the S&P and wondering why your account does not feel like it is near a record, that number is the explanation.
Why This Is Necessary
While this makes for miserable trading, the good news is that it is exactly what we need to set up new opportunities when things shift.
Markets do not produce good entry points while everyone is comfortable. The setups I want come from stocks that get pushed down for reasons that have nothing to do with their businesses, and that requires a stretch where people sell out of boredom, tax considerations, vacation schedules and general disinterest rather than conviction. We are entering that stretch now.
September is historically the weakest month of the year. October is known as the month when turns occur, and third-quarter earnings often mark the start of end-of-year strength. The calendar that is working against us right now flips in about six weeks.
Keep that in mind as you consider positioning in the weeks ahead. There is no rush to buy weakness at this point. You won’t miss much if you fail to catch the exact lows.
Game Plan
My positioning has not changed. Cash is high and I am doing very little. The setups I want are still developing, and a market drifting lower on disinterest is not the same thing as a market that has washed out. A washout gives you a level and a reason. A drift gives you neither, which is why buying into it usually means buying again lower a week later.
The stocks I want will get cheaper or they will not, and either way the calendar works in my favor from here. What I do not want is to have my capital committed before the weakness has run its course, because that is how you end up unable to buy the prices you were waiting for.
Patience costs almost nothing right now. Impatience is what costs money in August.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
