Recoveries Are Getting Weaker as Stock Market Develops Troubling Pattern
Two days of dip buying have not been enough to establish any meaningful technical support.
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For the second day in a row, buyers stepped up after a gap-down open triggered by fears of an expanding war in the Middle East. But the pattern is troubling.
On Monday, the dip buyers were confident enough to take the indices all the way back to flat, with the Russell 2000 (IWM) finishing with a sizable gain. It barely looked like anything significant was happening.
On Tuesday, facing a much more severe open, the same buyers could only recover a fraction of the damage. The Russell 2000 finished down about 1.75% and the S&P 500 was still down 0.9% even after a meaningful rally off the lows.
Each successive attempt to hold support is coming from a weaker position. That is not the tone of a market finding a bottom. It is the signature of a market where motivated sellers still outnumber motivated buyers.
Breadth Numbers Tell the Real Story
The index levels were poor but they partially hide the real damage we encountered on Tuesday. The S&P 500 being down 0.9% sounds fairly mild but when 70% of stocks finish in negative territory it is a different picture entirely.
Early in the day only about 10% of stocks were in positive territory. That improved through the session but at the closing bell it was still around 28%, which is not healthy by any measure. The indices are being partially supported by the handful of names benefiting directly from the crisis, oil, defense and a few defensive consumer names. Strip those out and the underlying damage is considerably worse than the headlines suggest.
The S&P 500 morning low of 6,710 took us back to November levels, but what concerns me more than the level itself is what I call a dangling-in-the-wind pattern. There is no good support here. There is just a single bar hanging in space with no base, no consolidation and no evidence of sustained buying interest at any particular level. Technical traders have no reference point to work from and that makes any subsequent gap-down potentially more disorderly because there is nothing to catch it.
Two Problems Compounding Each Other
The Iran situation and the AI transition are not just two separate problems sitting side by side. They are interacting with each other in a way that makes both harder to navigate.
Geopolitical flows are overwhelming the fundamental analysis that would normally help investors identify AI winners and losers. You cannot do the careful work of sorting through valuations and business models when the entire tape is being driven by oil prices and war headlines. Many experts have been surprised by the scope of the Iranian attacks on neighboring countries and the situation is likely to take weeks to fully resolve. Until it does, the AI story, which was already complicated enough, will remain in the background.
Game Plan
This is a market for very short-term trading if you want to be active. Focus on volatility and try to capture quick gains. This is not an environment to swing for home runs. The traders who profit most from volatility may do well in the near term but typically they will struggle with high levels of churn.
The big winners in difficult markets like this are almost always the investors who stayed patient, let the chaos run its course and then built sizable positions in great stocks after conditions improved. You do not need to predict the low. You do not need to be early. You just need to recognize when the character of the market shifts and be ready to act when it does. That shift will come. It always does. The investors who are prepared for it, who have done the work, preserved their capital and identified the stocks they want to own, will be the ones who benefit most when it arrives.
Home runs will develop for those who very slowly and incrementally average into longer-term positions in great stocks during this weakness. But that requires real patience and a strong stomach for continued volatility in the near term.
Have a good evening. I'll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
