Once again, the market narrative has shifted. For a month, we were told that this would be the biggest YOLO opportunity since 2020.
Retail investors pumped about $1.5 billion daily into the market, chasing the momentum rally ignited during the first week of the year.
Now, they’re about to be stuck holding the bag.
Suddenly the narrative has shifted back to recession, higher inflation, higher interest rates, and a breakdown around key support levels.
Funny how that happens.
Now that the S&P 500 and the Russell 2000 hit key support levels after a breakneck start, institutions gladly sell their stocks to retail traders chasing a rally. It’s a classic market flop.
Momentum went negative yesterday, indicating that money is leaving the markets.
Despite some short-term squeezes on crappy stocks, the undercurrent of selling remains strong. And that could be a problem for a lot of retail traders still holding the bag.
Here’s what I expect will happen in the coming days. I’ve moved to cash. I’m waiting for another opportunity to buy back in.
Let’s discuss this market.
Fed Minutes and Inflation
This market faces a string of tests over the next eight days.
Today, we had the Fed minutes, which showed multiple members seeking a higher pace of interest rates to combat entrenched inflation.
On Friday, we’ll likely see an elevated PCE Inflation number. If this figure comes in hotter than expected, the odds of a 50-basis point hike in March will zoom higher, while the market will likely move lower.
Finally, we have a jobs report emerging next Friday. Oh boy. That could be a doozy.
Even though large technology companies are laying off workers in droves, most employees are still on severance. Those job losses aren’t set to show up in reports for a few more months.
Meanwhile, companies are still struggling to hire.
These are the headlines. But none of this really matters. What matters is that there are more sellers than buyers. That’s it.
As I noted during a recent roundtable, the biggest threat to the market was a large risk-off decision. On February 2, 2023, that process started.
Investors started dumping stocks long before we saw the CPI or PPI numbers. Long before James Bullard at the St. Louis Fed started talking.
Long before we had any conversations about the Fed minutes.
More sellers than buyers… more money out than money in. And it’s been evident in the basic daily chart on the Russell 2000.
The Relative Strength Index, MACD, Money Flow Index, and ADX all suggest that capital is leaving the market quickly.
And from here, it might get much uglier.
Retail traders are now largely holding the bag, and they tend to sell without any level of discretion. They dump, and they dump fast as funds head for the exits.
Meanwhile, when we see negative outflows, it’s easy to be tricked by short-term pops. These are typically short squeezes that take advantage of low-volume periods of the day.
Be very careful as funds will use this period of time to sell into any short-term spike.
Remember, the purpose of a market… is to SELL.
This is a very important lesson. And when conditions get murky, funds cannot sell all at once.
They need to wait for optimal conditions – meaning that squeezes give them a nice exit point.
The result is a key trend in a negative environment. We tend to see lower highs and lower lows.
Tomorrow, we’ll talk about the best tools to use to short the market.
In the meantime, there is a lot riding on one last factor.
Tonight, NVIDIA (NVDA) will report earnings. This stock trades at an outrageous PE multiple (88.6x) and an even worse Price-to-Sales multiple (over 13X).
If NVDA misses earnings, warns about inventories, issues ugly guidance, or ends up slipping on revenue, the Nasdaq could experience a massive drop tomorrow.
I’ve moved to cash. I’m staying patient.
To your wealth,
Garrett Baldwin
P.S. It’s “Not a Time to Buy.” That’s what Marketwatch said today when discussing the frothy nature of the S&P 500 and the ongoing challenges of earnings compression. But there’s really good news…
The article also noted that we might be heading into the best period for stock pickers in our careers. After January’s rally, we might be facing a strong pullback. I’m not worried about it. I built a defensive stock portfolio to weather these markets. The portfolios consist of deep value and strong income stocks that can top inflation. Even more important, I advised my Tactical Wealth Investor members of yesterday’s momentum switch on the fly and advised them on how to hedge their portfolios, make gains during any downturn, and when to double down. Go here to join Tactical Wealth Investor.
Market Momentum is Red
Today, the market chopped around in a low-volume environment as we awaited the Fed minutes. The clear trend remains negative as investors continue to use short-term pops to dump shares. We’ll continue to eye this market for any short-term buying or forced buying. For now, the trend remains negative as investors expect the Fed to raise rates at a higher pace.
