The inability of stocks to react positively to Top Tier Inflections this earnings season is a testament to the messy backdrop that has unfolded since Inauguration Day. But this did not happen overnight. Termites have been quietly eating into the technical strength and underbelly of the market ever since the NYSE Common Stock Only A/D Line topped in mid-November. IF this indicator DOES NOT turn up and make higher highs in the next 1-2 months, this would materially increase the odds of further tough-sledding for equities through the Spring and maybe Summer:
Our process performs optimally when the percentage of NYSE stocks above their 150day SMA is between 60-75%. These are bull market readings that we enjoyed most of last year. Since topping in late December, the $NYA150R has been living in the low-50s, a neutral reading, challenging for our process:
With valuations stretched, the market tired and unhappy about the uncertainty being spewed out of DC daily, it is no wonder we have entered into the Land of Chop.
One of the most bullish signals markets can convey to investors is when stocks rally strongly on bad news. In the current messy tape, the rampant inability of Top Tier Inflections to break out and follow-through is an important signal, potentially auguring lower prices. IF stocks cannot go up on very good earnings, what will make prices go higher?
Well, lower prices will help.
We find it disconcerting that the BEST BREAKOUT of this earnings season was in LT Consumer Inflation Expectations, an important indicator the Fed watches closely. With tariffs realistically not going away, at least until the market calls Trump’s bluff on his negotiating techniques: a quick 12-15% correction in the SPY? It seems likely the LT Inflation View may build on itself further. Should we ever see a 4% handle in the coming months, this would certainly tilt the odds for rate hikes, not cuts. Interesting times, indeed.
On the flip side, pessimism is currently running rampant. In and of itself, our bearish tilt today could be viewed skeptically as a testament to the bearish sentiment that has been building strongly of late:
Typically, such extreme pessimism bodes well for a forthcoming big bounce in the market. But, the day-to-day abysmal action in equities suggests these extreme readings could become even more protracted.
Often when a correction is nearing its end, scores of new leaders will begin to manifest and break out WELL AHEAD of the market turning up. Our watch-list typically expands mightily during such times. We see no such signs as of yet. In fact, we see the opposite.
New 52-Week Lows are consistently outpacing New 52-Week Highs on the Nasdaq. Here is a snapshot from today. Not a disaster by any means, but also, not what we expect to see before the market is about to rip higher:
And then there are the market leaders. MAG 7 names have begun to splinter and turn down.
Take NVIDIA Corp. (NVDA), another market leader that is down on good news. What comes first, $115 or $135? In this backdrop, we will take the under.
Also notable, is chart of the Vaneck Semiconductor ETF (SHM). The SMH has been a leading group since 2023 and now it is below its 200day SMA. Such technical action often leads to a decisive leg lower. We will be watching the semis very closely...
Turning to Tesla Inc. (TSLA), actions have consequences. Elon Musk being so closely aligned with Trump is having serious consequences on Tesla sales in Europe:
A big miss on deliveries is clearly being discounted by the market, well before we receive official numbers in April. Tesla looks broken to us technically and is shortable on rallies back to its 150day SMA around $304 (light-blue line).
Take a look.
And then there is Applovin Corp. (APP) and Axon Enterprise Inc. (AXON), both of which reported stellar earnings, but a week later, each has broken their 50day SMAs decisively. All stocks have life cycles. Viewed objectively, we think each has seen their highs for this cycle.
AXON 1-YEAR DAILY
AXON is an amazing company. But this is another example of a market leader where its sterling fundamentals were already built into its price. Again, valuation is a persistent theme which helps explain many of the recent market difficulties.
Utilities, a strong leadership group until the past few weeks, are also under strong distribution. BOTH Vistra Corp. (VST) and Constellation Energy Corp. (CEG) appear to have put in long-term tops.
For those looking for shorts, both VST and CEG strike us as viable technical shorts, on rallies back to their respective 50day SMAs (highlighted on following charts):
Turning to small-caps, this is the third time the Russell 2000 is testing its 200day SMA. Usually, the third or fourth test of the 200-Day SMA will be the death knell for an uptrend. Will this play out in the coming weeks? We think so.
Remember, stocks go down a lot faster than they go up, so one more really bad day for small-caps and we will thereafter begin trading consistently below this long-term moving average. In our view, this does NOT bode well for a near-term sustainable uptrend to suddenly manifest and materialize. (Unless, of course, there is a sudden change to the noise and shenanigans coming out of DC).
Note how the Relative Strength line on the iShares Russell 2000 ETF (IWM) topped many months ago and how it is poised to break down to even lower lows:
To recap, we believe the market's inability to forge higher since Dec’24 has been mostly caused by valuations being stretched and the market being tired and unhappy about the uncertainty being spewed from DC each day.
Bonds are predicting a growth scare.
Uncertainty is high. The Fed is no longer backing equities.
Firmly entrenched in a chop-filled backdrop, we will be the first to admit that our process is at its worst during such periods. For now, those who specialize in trading volatility and fading breakouts are doing well. Hat tip to them!
We learned years ago to not mess with a winning process just because it is out of favor for the time period. In times like these, we look at our track record and garner faith that this too will pass. Our certainty in our ability to spot Top Tier Inflections, well ahead of most institutional investors, remains steadfast.
To this end, we are hard at work researching scores of names we believe will eventually become new market leaders in the next up-cycle. In the next two weeks, we will be following up with an in-depth report showcasing these companies.
Until then, our job is simple. A lot of due diligence and do as little harm as possible to our PnL.
A happy end of the week to all!
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Disclosure: We are short IWM & NVDA and currently in high levels of CASH. We may change our positioning at a moment’s notice, without notifying you of any such moves.
Disclaimer: All of the information in this piece has been prepped by Inflections Consulting LLC. Readers should know that it would be incorrect to assume that past and future names of interest will be profitable or will not turn into a loss. Inflections Consulting LLC does not and will not assume any liability for any loss that could occur if you invested in such stocks written about.
All the content in these reports have been prepared by Inflections Consulting LLC. We believe our sources to be reliable, but there is no guarantee here. The information in this piece does not constitute either an offer nor a solicitation to buy or sell any of the securities name-dropped in this piece.
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In no shape or manner should the views expressed in this piece be considered investment advice. We reserve the right to change our positioning in our IWM & NVDA stock and options positions at a moment’s notice without updating you on any such change in opinion and positioning. That may be tomorrow, even before our price target is hit. Facts change, our opinions can change quickly too.
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