Speculative Momentum Fizzles Out as Volatility Spikes
Dip buying has worked, but hot sectors are seeing aggressive profit-taking.
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In the last two weeks, the indexes have bounced back twice from sharp selloffs, but it has taken place along with sharp rotational action. Dip buyers of the hottest stocks didn’t stick around for long, and groups such as gold, rare earth, nuclear, data centers, and Bitcoin-related names have seen increased pressure, although the DJIA hit a new all-time high.
The relative strength in small-caps and speculative names provided fantastic trading for the past couple of months, but it has become increasingly choppy and inconsistent. Profit-taking in the hottest names has been gaining traction, and some of the biggest names are already substantially off their recent highs.
Another warning sign has been the pressure on Bitcoin-related names. Bitcoin (IBIT) is under its 50-day simple moving average and at its lowest point since early July. Cryptocurrencies are highly correlated to speculative interest, and they have been struggling for a while.
The start of the bulk of earnings season is another potential problem. Netflix (NFLX) kicked things off with a disappointing report and is trading down 6.5% on Wednesday morning. While it is still holding above some support around $1,150, it is in a precarious condition.
Tesla (TSLA) reports after the close Wednesday, and will be another test of speculative interest. TSLA jumped sharply in September and has been consolidating for weeks. It is a good setup for a positive reaction, but if it disappoints, it will head for the 50-day simple moving average around $384.
Next week, we will start to see earnings from the Magnificent Seven, which will determine market direction to a great degree.
The dilemma of this market is that while dip buying has worked on a very short-term basis, the rebounds are not holding up, and the news flow is problematic. It is time to play tougher defense and to try to limit drawdowns.
We have a mixed start on Wednesday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
