Key Notes & Observations (Thursday)

The most important thing...

Key Notes & Observations (Thursday)

Disclaimer: this is not a forecast, but a discussion of ideal scenarios — based on prior patterns and a study of history.

A mere two weeks after they topped, SOX and NDX are on the verge of erasing HALF their YTD gains.

• “What happens on the other side of a melt-up? Answer: things that were considered mathematically impossible, begin to happen regularly.” (July 12 note)

• Even a small residual decline to test their respective 100dmas (a standard support area) would officially wipe out half the YTD performance of these leading indexes.

• Two-week losses of this magnitude are infrequent — another indication of the fragility of markets here.

• Even the rotation areas plunged yesterday — confirming the exhaustion signals discussed last week.

These are staggering relative and absolute performance losses.

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WHAT’S NEXT?

Near-Term:

• A number of my indicators are approaching near-term oversold conditions, which we'll cover in detail in the upcoming Weekly Review.

• If/when confirmed, historical patterns suggest a meaningful bounce should begin by month-end and last several weeks into August.

• As conditions develop, we’ll focus on the key signals in real-time and publish them on this research page to subscribers.

Intermediate-Term:

• Big picture, this is a classic Momentum unwind, with several months left in the year — an eternity in markets.

• NDX is tracking at nearly 2 Beta to S&P.

• SOX is tracking over 3 Beta to S&P.

• S&P is only down 4.4% from the highs, entering weak Q3 seasonality in a typically volatile election year.

Therefore it's not a stretch by any means… to think that even a standard (for example) S&P pullback to ~5100 key support —a normal 10% peak-to-trough correction— could lead to severe additional losses for High-Beta Momentum.

I think the most important thing over the next weeks will be to measure the quality and extent of a potential bounce in key markets, and IF such a bounce fails. Not just how Equities develop, but also Rates and even more so, Currencies.

There are ways to approach this, and I'll be covering them as we go.

IF a bounce eventually fails, imagine what happens to (still) crowded positions if markets extend their Intermediate-term correction —and Momentum leaders continue to unwind into later Q3— further testing the resolve of trapped buyers.

Hard decisions will have to be made.

Thanks for reading.