Ugly Action Raises Concern That Significant Pullback Is Developing
After a sell-the-news Palantir reaction prompted a down day, time will tell how deep the pullback could go.
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For many months, pessimistic bears have been looking for a "sell the news" reaction to signal that a significant market top is forming. A series of economic reports, Fed decisions, tariff news and earnings reports failed to deliver the negative action the bears were hoping for until Tuesday.
What was different this time was that very few investors anticipated that Palantir (PLTR) would be the stock that triggered the painful sell-the-news reaction, but it was a classic setup and the sell-the-news reaction hit hard. Palantir has been one of the best-performing stocks in the AI sector, and not only was it technically extended, but it was expensive on most metrics. When the stock traded down on a solid report and good guidance, the "sell the news" action quickly spread to the broader market and technology in particular.
The market was under pressure all day and closed at the lows, which is not a good sign. Breadth was around three losers for every gainer, and the biggest loser was the Nasdaq 100 (QQQ) , which lost about 2.1%. The Magnificent Seven (MAGS) dropped 2.2% and the Russell 2000 (IWM) was hit for a 1.7% loss. Retail, pharmaceuticals and some dividend names saw inflows from investors looking for safety, but the rotational action was limited.
The question now is whether the price action on Tuesday is a significant shift that will push investors to lock in the gains they have left and then stand aside while a deeper correction takes hold. There have been a few other ugly days like this recently, and they have quickly been forgotten and overcome, but this feels a bit different, as the valuation argument is taking hold and the AI sector struggles with overbought technical conditions.
If this is the start of a deeper correction, then the secondary issue is whether there will be rotational action or just broad selling of everything. Breadth on Tuesday was very poor, with just 27% of stocks with gains and the indices closing at the lows of the day.
The most important thing to do now is to focus on protecting capital and to move into position so that you will be able to take advantage of the good opportunities that will eventually develop. It is important to stay patient and to move incrementally.
I’ll have more on strategy and tactics on Wednesday.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
