I Shouldn’t Leave

Some of you might have noticed that I’ve been quiet for a couple of days.  (At least I hope you’ve noticed…)  I’ve been traveling on business for the past couple of days, so while I have been engaged in markets, I haven’t had the opportunity to write my daily pieces or comment publicly about the recent volatility.  One of my out-of-office messages says, “don’t let the markets crash in my absence.”  After the volatility of the past few days, that remark seems even snarkier than usual.

Because of time constraints today, I’ll need to be brief. We’re now seeing what happens when consensus gets shaken and momentum breaks.  Some of the most reliable themes were shattered in recent days.  While their recent demise does not definitively portend that they will continue to fail, the longer the damage persists, the harder it will be to resuscitate these market drivers.

6-Days, ES (red/green 5-minute candles, right scale), NQ (blue line, left) June Futures

Source: Interactive Brokers, past performance is not indicative of future returns.

The above chart shows the damage that has occurred since last Wednesday, the day before Broadcom (AVGO) earnings were released.  A key narrative was punctured after that day’s close – that AI-related revenues and earnings were going to climb unimpeded for the near future.  After a solid run of positive earnings and guidance from a range of the recipients of that largesse, AVGO reported poor revenue guidance for the coming quarter.  Note, however, that stocks rallied on Thursday, nonetheless.  The key themes were intact, at least for that day.  It took another day for them to unravel.

1. The idea of unrelenting spending pushing semiconductor stocks ever higher was punctured on Friday, when the Philadelphia Semiconductor Index (SOX) fell more than 10%.  That selling continued into Asian trading on Monday, when South Korea’s KOSPI index fell by more than 8%.  While SOX was able to recoup about half its losses on Monday, the index has since given back most of those gains and is less than 1% above Friday’s close as I type this.  Remember, parabolic moves are inherently unstable and typically end badly and with unpredictable timing.  Even modest profit-taking has dramatic effects in that sort of environment.
2. The notion that “buy-the-dip” works all the time every time has taken a bit of a turn this week.  Even though SOX was able to bounce substantially on Monday (before falling the next day and a half), the S&P 500 and Nasdaq 100 have not managed meaningful bounces from Friday’s close.  There have been attempts to rally, but those were fleeting, leading to only a modest bump on Monday and sharper selling yesterday.  It seemed as though there were hopeful rallies, perhaps reflecting genuine enthusiasm, perhaps staged to get excitable rally-chasers to follow along, but they failed.  Nonetheless, key benchmarks did bounce nicely off yesterday’s lows and we’re yet to test them again today.
3. The ratchet gave way.  After weeks of reliable rallies when the President offered hopeful news about an end to hostilities in the Persian Gulf, traders were unprepared when shooting resumed yesterday and today.  We are certainly not back to the level of shooting that prevailed in March, but we are also more than three months into the war with no tangible progress toward ending it. 

The failure to maintain a rally or even a sustainable bounce is more concerning to me than the fact that we’ve had a few down days in the past week.  There is no incontrovertible evidence of a major psychological change, but there are many more warning signs of one than just a week ago.  Now, I’m off to the airport…