Daily Wrap – Falling Three Methods?
- According to Rubner, Friday’s meltdown triggered the largest single-day call buying ever from retail on their platform. And it wasn’t just Friday, it has been months of this.
More broadly:
- Retail Equities: Net buyers in 23 of last 26 weeks and 7-straight weeks
- Retail Options: 24-week net buying streak (a record)
- Retail ETFs: ETF buyers in 206 of 208 trading days
- Institutions: Hedging “macro” longs 8 of last 9 weeks (someone has some sense).
With regard to Tuesday’s reach-for-risk (procyclicals and value), I wrote, “One Day Is Not a Trend”
SPX (2m) & my Equal Weight Index of Cyclical sectors. There’s Tuesday’s strength, and no follow-through. Notice the relative weakness in this factor just ahead of Friday’s meltdown. It’s almost as if… someone knew something. We knew something was/is coming with all of the ABI and Volatility Correlation signals.
As noted yesterday, mega caps continue to lag behind the broader market since Trump’s tariff tweet Friday.
SPX (2m) and my Equal Weight Index of Mag-7 Stocks – You can see the relative weakness Tuesday (second day of the bounce) and not much else in the way of leadership.
On Tuesday the Mag-7 Mega Caps underperformed the Equal Weight S&P by -170 basis points, and only outperformed by +55 basis points today. As my Equal Weight Index of mega caps above shows, the mega caps are NOT providing leadership. Or…
This chart is normalized as of Friday morning, catching the crack lower and the oversold rebound this week. If anything, the mega caps are a weak link since the tariff tweet Friday. The exception is the Tech sector or more specifically, Semiconductors (SOX). This is why I’m watching them and Nvidia at its 50-day so closely. If or when we get the signal, I’ll be glad to add to my position.
What is interesting today is that there’s a more defensive tone developing…
SPX (2m) and my Equal Weight Index of Counter-cyclical/defensive sectors.
Averages
The major averages ultimately finished well off their session highs. The small-cap Russell 2000 outperformed on the back of another massive short squeeze, but the S&P Mid Cap 400 (+0.1%) had a flattish performance, and Dow Transports (0%) were dead flat. The DJIA doesn’t get the benefit of short squeezes (Small Caps do), nor the cap-weighted benefit of mega caps (Nasdaq and SPX do). The Dow closed flat.
S&P-500 ⇧ 0.40 %
NASDAQ ⇧ 0.68 %
DOW JONES ⇩ -0.04 %
RUSSELL 2000 ⇧ 0.97 %Â
As covered earlier today, now that we’re 3 days into it, if we account for tariff news that gapped stocks down Tuesday, this isn’t far off from the Falling Three Methods candlestick pattern I thought was the highest probability coming into this week.
SPX (daily) – All three price candles should be stepping higher. Tuesday’s gap lower at the open screwed it up a little, but price closed higher than the open. The third candle (today) tends to be a smaller bodied candle or a loss of momentum as the pattern matures. All three candles are inside Friday’s open to close range (big red candle).
The Nasdaq-100 has the same…
I didn’t expect to see this pattern in the Dow, as the Dow is not heavily weighted toward Tech and the AI narrative that’s been driving bullish sentiment, but it actually qualifies too.
Not textbook, but all three real bodies fall within Friday’s open/close range. There’s a lot of intraday volatility the last two days with long upper and lower candlestick wicks. The wicks do not need to be contained in Friday’s candle.
Small Caps received the benefit of another massive short-squeeze, but a very different short squeeze than Tuesday’s.
SPX & my Most Shorted Index of stocks (1m)
Source: Bloomberg
And Small Caps always benefit the most…
IWM (daily) Today is an extreme Long-Legged Doji Star candlestick. The candlestick signifies high volatility and market indecision where neither buyers nor sellers have taken control. This candle indicates that price has moved significantly up and down during the session, but closed near its opening price (3 cents off), often signaling that a trend may be weakening.  That trend line is still the key level to watch.Â
“The squeeze was massive, but it wasn’t all of the usual suspects. Non-Profitable Tech (-1.05%) & Nasdaq Biotechs (-0.15%) didn’t participate. It was the more cyclically exposed value areas that gained most such as Airlines (+3.7%), Home Builders (+3.15%), Regional Banks (+3.1%) and the Retail sector (+1.6%).
Some other consumer cyclical facing areas (not necessarily most shorted) performed well, like Resorts & Casinos (+2.8%), Cruise Lines (+3.1%), Recreational Vehicles (+5.1%) and Luxury Goods (+1.7%).”
Today the Growth/Tech side was squeezed: Non-Profitable Tech (+2.8%) and especially Biotechs (+3.1%), but rather than the consumer cyclical side dominating like Tuesday, Consumer Defensive took the top spot. The observation aligns with the three charts above showing investors pivoting to a more defensive stance.Â
Tuesday’s short squeeze leaders were weaker today: Airlines (+0.55%), Home Builders (+0.15%), Regional Banks (-2.25%), Retail (+0.2%). As for some of the other consumer cyclicals that flew higher Tuesday: Resorts & Casinos (+0.15%), Cruise lines (-0.75%), Recreational Vehicles (-1.35%) were all much weaker today.
Think about this…Â
Auto loan delinquencies have been rising and are above pre-pandemic levels. Auto loans that are 90 or more days delinquent are the highest since 2010. In the wake of TriColor Auto going belly up (the 7th largest used car dealer) we have banks like Goldman Sachs reporting earnings and making a point to say that they don’t have direct exposure to auto loans. An estimated 2 million government workers aren’t getting an immediate paycheck amid the government shutdown… Yet investors bid up the Recreational Vehicle subsector over +5% yesterday? REALLY?Â
The short squeeze Tuesday was very consumer cyclical-facing. Other than Tech and Biotech leading today, there was a more defensive bias today with Retail-Defensive being the top performing in my Most Shorted Index.Â
Volatility acted well today, but VVIX (+3.65%) stood out with incredible relative strength, positing a new higher high since the entire move in Vol started Friday.
(5m) VVIX’s relative performance has a strong tendency to lead VIX’s. This is what inspired me to add some more to my long volatility position this afternoon.
Seriously, look at this chart…
VVIX (10m) – The stock market is correcting over the last three days (highlighted in green) and VVIX is not only holding gains, it’s making higher highs and higher lows, with a higher high this afternoon!
VIX has already added the ~50% since the first ABI signal, but with as many signals as we have, and the fact volatility has not come down sharply this week (which I’d expect even in a textbook Falling Three Methods consolidation pattern over 3 days), I expect there’s more to come.
VIX (daily) especially considering what happened after the last two clusters of ABI signals in July of 2024 and February this year.
S&P sectors
All eleven S&P 500 sectors traded higher for much of the morning after Treasury Secretary Bessent suggested in a press conference that a longer trade truce could be achieved if China delays implementing its restrictions on rare earth exports. Tech lent the market the most support, but the top two performing sectors were both defensive– Real Estate and Utilities. The real estate and utilities sectors continued their run of outperformance this week, that says, “defensive.” It’s right there under the surface.
The lagards? Yesterday’s style factor, short-squeeze winners – the procyclical sectors: Materials, Industrials, Energy (which was down with oil on Tuesday) and Financials.
Don’t forget about the technical levels in play that I talked about in tuesday’s Wrap.
The Materials sector isn’t going to move the market, but it does signal. Here it is trapped between support at the 200-day (white) and resistance at the 100-day (blue). Price literally was stopped in its tracks on the open at the 100-day. There are some more important assets and technical levels (see yesterday’s Wrap) that are key right now – E.g.- SPX and the 50-day.
The Technology sector was supported by strength in chipmakers after chip-making equipment manufacturer ASML (ASML +2.7%) reported strong bookings in its Q3 earnings report this morning. Advanced Micro Devices (AMD +9.40%) was one of the top-performing names in the S&P 500 today, and the best in the Philly Semiconductor Index.
Among the mega caps (MGK +0.6%) Alphabet (GOOG +2.25%) and Meta Platforms (META +1.25%) were top performers, though fading strength in the market’s largest names throughout the session saw the S&P 500 Equal Weighted Index (+0.2%) close just slightly lower than the market-weighted S&P 500 (+0.4%). Yesterday the EW S&P blew away mega caps by 170 basis points. Today mega caps are in the leadership role and have just a 40 basis point edge.
Semis (SOX) closed +3% higher. Nvidia (NVDA -0.1%) was one of only two stocks in the index to close lower and look where it’s fighting…
Right at that $184-$184.50 level coinciding with the 50-day (179.47). As I said last night, the 50-day will be right there at price support, probably tomorrow. KEY LEVEL.
As pointed out earlier today (Wednesday), Apple and Amazon both have key price patterns that could signal, too.
Semis (SOX +3%) are still acting better than most stuff. The AI hype is still alive and that makes them the continuing, proverbial canary in the coalmine. A 3% day up and this is what we have…
Not a textbook Falling Three Methods as Tuesday was lower, but otherwise it’s damn close. All 3 candles are inside Friday and we end with a Hanging Man candle today on a 3% gain.
Morgan Stanley (MS +4.7%) and Bank of America (BAC +4.37%) captured solid gains in response to their earnings beats, while PNC (PNC -3.90%) faced pressure due to downside guidance and Progressive (PGR -5.8%) slipped on an earnings miss.
The KBW Bank index (+0.4%) added modestly to yesterday’s +1.8% gain, while Regional Banks (-2.25%) faded most of yesterday’s short squeeze-driven +3.1% gain, with technical resistance at the 50-day coming into play. Regional Banks and Small Caps are pretty much synonymous. Regional Banks (KRE) are trapped between the 50-day and 100-day, so those are key levels to watch as it relates to the banks, but more so, Russell 2000.
(daily) – Notice how the 50-day went from acting as support, to now acting as resistance. If these break the 100-day (not pictured), that’s going to be a key actionable signal for Small Caps (IWM).
Materials ⇩ -0.45 %
Energy ⇩ -0.06 %
Financials ⇧ 0.00 %
Industrial ⇩ -0.42 %
Technology ⇧ 0.99 %
Consumer Staples ⇧ 0.18 %
Utilities ⇧ 1.31 %
Health Care ⇧ 0.15 %
Consumer Discretionary ⇧ 0.15 %
Real Estate ⇧ 1.45 %
Communications ⇧ 0.71 %
Internals
Advancers (1688) couldn’t even edge out a 2-to-1 margin over Decliners (1069) today. Volume came in at 1.17bln shares.
There is no Dominant price/volume relationship across all of the averages, except the Dow. Remember that Tuesday Dow component stocks came in with the strongest relationship, Close Up/Volume Up. There was no follow through today with the only dominant theme among the averages – Close Down/Volume Down. That’s typical of a consolidation day, but not a good sign with regard to Tuesday’s pro-cyclical rotation. There’s no 1-day overbought internals signal.
The 3 days of correction, did however, reset breadth oscillators from oversold back to overbought.
It’s safe to short again when opportunities present.
Less than half of S&P-500 component stocks (47%) trade above their own 50-day SMA.
At or near record highs this should be above 80%.
Treasuries
U.S. Treasuries finished Wednesday with losses across the curve after reversing from their mostly higher start. The 2-year yield settled up two basis points to 3.50%, and the 10-year yield settled up two basis points to 4.05%.
We are at an interesting area for the 10-yr yield…
(daily) 10-yr yield bouncing off 4.00% again. A bounce higher isn’t helpful for stock valuations, but a sharp break lower is more of a macro signal like crude oil, saying that economic growth expectations are declining. From a macro signal viewpoint, this is a key level.
Short-term (this week) HY Credit’s relative performance is still decent, which is among the reasons I didn’t add to market shorts yet.
SPX/HYG (10m)Â – I’ll be looking for HYG’s short-term relative performance to negatively diverge with the S&P. If it’s sharp, that’s an actionable signal. If I see it, I’ll send out an update.
Big picture, there’s still an issue reflected in HY Credit’s notable relative weakness…
(2H) This is the first time in the trend off April lows that we’re seeing something like this. I don’t know that Tricolor Auto and First Brands accounts for this. I have a feeling there’s something under the surface that’s not public knowledge yet – some kind of credit event.
Currencies and Commodities
The U.S. Dollar Index -0.35% to $98.68
WTI Crude oil closed up +0.1% to $58.75/bbl. As pointed out earlier, price is consolidation with a bearish bias.
(30m) This is in a newly emerging down trend out of the trading range. If price can test and hold the $57.80-$58 area, then maybe price finds some temporary support and we go from there. The $58 area is the measured move for the second leg down out of that bear flag in the middle of the chart, so there’s a chance. Otherwise, the next leg down is smaller, around -2.6% from a break of the small trend line.
Gold futures settled +0.9% higher to a new record high –$4,201.60/oz. Given what I’ve seen elsewhere, I wonder is there’s some Safe-haven demand in play amid renewed U.S./China trade tensions?
(15m) A small consolidation appears to be starting within a stone’s throw of my measured move for this leg at $4200, but the consolidation phase isn’t definitive yet.
Silver futures closed up +3.75% to $52.52/oz.
(10m) – Silver really needs a consolidation and for that it needs to pull back. If it were to consolidate here, I’d say it needs to pull back to at least $50. There’s nothing wrong with being long silver, but with the parabolic price action, you have to stay on top of trade and risk management. This can come down suddenly, fast and hard.
URA gained another +2%, but as mentioned earlier today, I’m not loving the early gains being faded. I love URA long-term, but short term I’d stay on top of trade management. I don’t see any reasons to sell it, even on a trading basis, although I wouldn’t disagree with taking some profits. I think the risk isn’t so much URA, but broader market-related sentiment risk, especially if Semis break and the AI narrative is questioned. URA is related via the “Power Up America” basket.
The same risk dynamics apply for REMX, down -2.3% today with a small bearish Engulfing candle and what could be considered a minor Key Reversal Day for the new primary bull market trend.
It looks like my suspicion of “churning” that I talked about in yesterday’s Daily Wrap was correct.
From 3C charts, I’m a little more concerned about REMX than URA, but I think both have sentiment risk.
URA (2m) – 3C is leading price higher. This looks good.
REMX (2m) 3C is not confirming recent highs. To me, this looks like 3C is calling out a consolidation to come, but the heavy volume the last few days with little forward progress looks like churning –a lot of shares exchanging hands but not moving price. If that’s correct, I’d like to see a correction/consolidation to shake out the new weak hands and attract new strong hands to add to the base of strong hands. Consolidations are important. The tone of a consolidation tells you what you need to know about the health of the consolidation and trend. I think it’s fine longer-term, but there’s risk near-term.
While Index futures were up overnight and in pre-market Wednesday, it struck me that crypto wasn’t getting a risk-on bid. It was trading lower.
(7m)- Overnight and premarket highlighted in orange.
More broadly, where’s the risk-on bid that Bitcoin finally got right up until last week?
(15m) BTC futures aren’t looking very risk-on to me.
As for price…
(daily) – Late September-first week of October BTC got a strong bid, which aligns with the frothy volatility correlation signals showing up at the same time. Since Friday’s decline, where’s the bid? One day (Sunday) of knee-jerk reaction to the White House walking back Trump’s Friday tweet. That’s it? BTC is still finding support at the $110k area. Should that break I think selling picks up notably.
Summary
The bounce this week has shown the retail dip buyers are still extremely active and engaged. There’s also a dash for trash. We saw that very clearly Tuesday and today with non-profitable tech soaring relative to mega cap tech. Back in late 1999 I came across a discovery. I can’t remember the exact parameters, but I think it was stocks under $5 with extremely high P/E’s. Quality stocks tended to lead bull markets, but at the end of a bull market, there was a dash for trash. 25 years later the positive VIX correlation signals, including the 30-day “Grim Reaper”, have been popping off like popcorn, indicative of the same group-think, mass-psychology mentality, excessive risk-taking and extremely frothy sentiment.
That’s happening while market participation is extremely narrow. The S&P is -1.2% from its record high, yet just 47% of its stocks are above their 50-day moving average. These aren’t even the trash stocks, these are the Standard and Poor 500.
Remember that a Falling Three Methods isn’t always 3 candles, sometimes it’s two, four or five.
I was good with adding some long volatility exposure today. I’ll be looking for actionable signals to add to the other positions.
In Small Caps’ case, I’d love to see a gap up above today’s Doji Star, and if that starts fading, maybe we get a signals from HY Credit diverging from the SPX, then I’d jump on that.
With the SPX/Nasdaq, it’s still all about the AI narrative so NVDA’s 50-day is important and how SOX acts from here. Signals could come from somewhere else entirely, but those are two to be watching closely given what’s at stake…
As I mentioned, once a move starts, no more signals. Or at least it’s very rare.
If we look back to the two previous clusters which were nowhere near as big as this one…
Earlier this year-Liberation Day Tariffs, 4 signals and the move starts. There are none after that.
July 2024 Tech Wreck 8 signals in 9 days, and a Falling Three Methods in the Nasdaq. No signals after that initial crack lower.
Goldman’s trading desk notes that CTAs are sellers in all scenarios in the US over the short term.
- Over the next week, CTAs to sell $1.77B in a flat tape, $2.75B in an up tape, and $10.62B in a down tape.
- Short term pivot level for CTAs is currently 6,586 on SPX futures.
Overnight
Index futures are flat tonight. Take a look at price action through the lens of futures.
S&P futures (10m) it kind of looks like a big sloppy bear flag doesn’t it? That’s what a falling 3 methods Candlestick pattern tends to look like on an intraday chart. We still need the sell signal. Everything mentioned above, but I’m on it.
I like my position sizes right now. My leveraged long Vol position has done wonders to mitigate the short exposure during this correction/consolidation. I still have room to add, but I’m pretty happy with my Volatility position size.
The U.S. dollar index is down 0.3% tonight.
So, WTI crude oil futures are up 0.75%, but they are still trading in that small bear flag.
With the Dollar down and yields down ~2bp across the curve, Gold futures are of course up +1.2% to$4253, Good Lord! Forget about that small, non-definitive consolidation. Price blew right threw it.
Silver futures +2.6% are going along for the ride, but price is struggling a little with some local resistance.
(5m) Imagine you bought in the middle of the night at the $52.45 area, then you went for that ride lower. When price gets back just above where you bought, what do you do? That ride lower wasn’t fun, maybe even left a little PTSD. That’s the nature of overhead supply.
Bitcoin (+1%) is struggling to bounce off what has been reliable support this week at $110k.
See you in the morning!