Walmart Leaves Nowhere to Hide
Wednesday’s bond relief and biotech celebration lasted exactly one session.
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It was an ugly day. As I wrote on Thursday morning, the Moderna news and the Treasury bond buying were not going to change anything, and Thursday made that clear in a hurry.
Biotechnology gave back 3% after Wednesday’s celebration. The 20+ Year Treasury Bond Fund (TLT) finished lower, which means the Treasury buyback relief lasted roughly one session. Breadth was ugly at 36% positive and there were more new 12-month lows than new highs. The only green on my screens was the semiconductor group, which finished close to flat. We confirmed the ugliness with a close at the lows of the day.
The S&P 500 was only down 0.8% but it was one of the days that felt much worse than what the indices indicated.
Few Places to Hide
The character of this selling is what separates it from most of what we have seen this year. There was no rotation to absorb the damage. Money leaving one group did not show up in another, and the groups that have been taking turns holding the indices together all went down together.
That is the condition I have been saying we lacked. For months, every decline has been rotational, with the indices absorbing hits because the money never left the market. On Thursday, it left and there was nothing underneath to catch it.
The internals confirm how broad it was. Forty-nine percent of stocks are now below their 50-day moving average and 47% are below their 200-day. Those two numbers being nearly identical is unusual. In a normal pullback far more stocks lose the 50-day than the 200-day, because the shorter average sits closer to price. When they converge it means the selling has gone deep enough to take out long-term trends rather than just recent ones. This is a function of the constant rotation that is hidden by the indices. The indices are not as healthy as some folks, including Investor’s Business Daily, seem to think they are.
The action is a continuation of the ugly action from Tuesday, which got a brief pause on Wednesday when the Treasury stepped in and Moderna surged. Neither of those was a catalyst. They were interruptions and the underlying trend reasserted itself within a session.
Seasonality Is Now in Full Swing
The negative seasonality I have been anticipating for weeks is now clearly in play. I said repeatedly that it had been late in arriving and that the anticipation of a pullback was preventing the pullback. That has resolved.
The pattern I told readers I was watching for was a sharp reversal with a close near the lows. We have had two of those in three sessions. That is the character change, and it has arrived alongside a bond market that will not cooperate, a consumer that Walmart (WMT) says is under pressure, and an inflation problem that has not gone away.
September is historically the weakest month of the year. We are not there yet but some folks seem to be anticipating some problems.
Game Plan
My positioning has not changed and I am comfortable with that. Cash is high, I trimmed biotech into strength on Wednesday, and I made one small purchase on Thursday morning.
Days like this are what create the opportunities I have been waiting for. The setups I want come from stocks that get sold for reasons that have nothing to do with their businesses, and that requires exactly this kind of indiscriminate selling. It is unpleasant while it happens and it is the necessary condition for what comes next.
There is no rush. We have about five weeks before seasonality turns and third quarter earnings begin. The stocks on my list will be cheaper or they will not, and either way I would rather have the capital available than committed.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
