The Seeds of Capitulation Are There, But We Might Need One Last Push
We’re all waiting for it, but the market so far refuses to deliver. Plus, the pros are now betting on this, tax-loss ideas and more.
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The Market
We have had an Either/Or Market for so long that we have not been able to get a market that is fully oversold or overbought all at once. It’s also the reason we tend not to get panicky days where 90% of the volume is on the downside.
The major indexes have not broken serious support. Not yet. For example, the Dow is still over 50,000. The Transports are over 19,500, the iShares Russell 2000 ETF (IWM) is over 270. The Nasdaq, despite the shellacking it has taken, is still over 24,200.
Yet it is hard to find a single group that, over the course of the last few months, hasn’t broken its own support at some point. I suppose it is possible that we continue rotating back and forth between semis and the rest of the market for a long time to come but my experience says eventually everything trades together. We came close Thursday. But we didn’t have real panic. Rather we had signs of it.
I realize this is subjective. We all, me included, prefer it when there is a 90% down day, the VIX gets jumpy, the volume surges, the put/call ratio flies over 1.0, and even though they haven’t done one since Covid, CNBC has a “Markets in Turmoil” special. It is at those times that the market looks clearest.
But that is not the case currently. We did not get 90% of the volume on the downside. We have the first signs that the VIX got jumpy. We had volume rise. We had the put/call ratio over 1.0. So, in my view, the seeds are there. My only question is if we need that last push that, say, shows 90% of the volume on the downside coupled with all the other items.
Or do we need some of those sentiment surveys, such as the Investors Intelligence folks to see a jump from the Correction camp into the Bear camp? Do we need those day traders at AAII to show more than 50% are bearish? Do we need the NAAIM folks to reduce their exposure under 50% (they are currently in the mid-70s)? In the past, at well-defined capitulatory lows, most of those have been in place.
On Friday we had our first sign that the VIX options traders have changed their tune. For months I have noted the complacency in the market and one of the signs has been how often the VIX options traders were loading up on calls. By that I mean the put/call ratio for the VIX was 0.20 or below. That means the pros are betting on a higher VIX.
Friday the put/call ratio for the VIX surged to 1.58. That means the pros are now betting on a lower VIX. I view the VIX options traders as pros. We want to be on their side. We’ve had three high readings in the last year. There were two in June: mid-month and at the end of the month. The S&P did not surge from there, it rallied. Prior to that we saw one in late November. Again, the S&P had a nice rally but it was the “others” that scored big off of that reading.
I still think the Nasdaq gets short-term oversold this coming week. If we get one of those capitulatory days first it ought to be clear and obvious. If we don’t then I believe the rally will not be as strong as everyone would like it to be.
New Ideas
First, I would reiterate that when looking for a capitulatory low it is the indexes I turn to, not individual stocks. In this case, since it is the Nasdaq, it would be the QQQs, or if you want the VanEck Semiconductor ETF (SMH).
But then there is Meta (META), which I was asked about a few weeks ago when the stock was $610. I thought it would rally and come back down. It has a tendency to do that. That spike low on Thursday (call it $580) should be a good spot to trade against.
In the candidates for tax -rallies I put the Global X Uranium (URA), an ETF to be long uranium stocks. It’s been down for so long that if it can stay over Thursday’s low I think it can have a tradeable rally.
Today’s Indicator
The new lows on Friday on the Nasdaq were still high at 390 but at least for now they haven’t expanded beyond 850, which was Thursday’s level.
Q&A/Reader’s Feedback
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Let me begin by responding to the person who keeps asking for a list of the top-10 tax-loss candidates. I’m not big on lists so apologies since I will not make one. Over the last month or so I have offered various names that I think would be good candidates. Some have already had their fling (see PulteGroup (PHM), Goldman Sachs (GS), Nike (NKE)). Some haven’t yet budged (see Alcoa (AA)). Down below you will see I have been asked about Boeing (BA). I would put that on the list too. Above you will see I think URA can have a rally. The names will pop up when I see them, not when I am forced to see them.
Boeing (BA) has a decent risk/reward for a tax-loss trade because if it cracks under $170 like it means it there is still support at $165, but the higher low that is in place gets spoiled. It will be tough to get through $185, though.
I have not liked Broadcom (AVGO) for quite some time and I still don’t like the chart. But it has some support in this $285-290 area so it ought to bounce. If it can rally to fill that gap at $320 I’d consider it a gift. If it gaps up over $320 and leaves the last two trading days as an island that would change my view to bullish.
Axon Enterprise (AXON) looks like a fresh breakdown. Sure it is getting oversold, having gone down over 100 points in two days but that is the best I can say about it.
