What’d I Miss?

Long vacations are certainly refreshing, but they can also be a bit disorienting – especially when you are in a vastly different time zone.  I was in Australia for the past two weeks, and it was certainly odd to wake up each morning shortly before the US markets closed.  Even though I followed the goings-on in the financial arena somewhat closely, the vast time difference allowed me to unplug more fully and use a broader perspective when assessing the markets’ day-to-day gyrations.  It seems to me that a sentiment change is seeping into some of the more reliable speculative trades.

All things considered, I didn’t miss too much.  Major stock indices, like the S&P 500 (SPX) and Nasdaq 100 (NDX) are slightly lower, and bond yields are slightly higher.  There were some major intraday swings, particularly last week when stocks zoomed on the prospect of an end to the government shutdown, then sold off sharply on Thursday and early Friday, only for dip buyers to step in once again just before the week ended. 

Two Weeks, December 10-Year Treasury Futures (ZN, red/green candles), SPX (blue), NDX (purple)

Source: Interactive Brokers

Those behaviors are not out of the ordinary.  Over the past few years, we have written countless times about the propensity of equity traders to buy dips and chase rallies.  Indeed, the post-shutdown enthusiasm seemed a bit much, considering that stock investors had not been particularly perturbed by the shutdown itself nor its effects, but given the propensity for traders to pounce on any positive story, the move was not completely out of character.  Yet there seems to be a different feeling to the tape.  I wouldn’t say yet that we’ve fully flipped to “sell rallies” mode, but there are signs that at least for now, we have moved to a more balanced approach, where a nimbler stance of buying dips and selling rallies is more tactically sensible.

The chart below shows some of the subtle changes that bring me to that opinion.  First, the most recent short-term high for SPX is below the all-time high set late last month.  That’s not a big deal in itself, at least as long as we don’t meaningfully take out either the 6631 low from earlier this month or the 50-day moving average, but neither seems assured – especially with SPX riding along that trendline in recent days.  (We were below the 50-day’s 6708 level when I typed this.)  SPX has also been flirting more with the lower end, or even the middle, of its 10-day trading channel than the upper end, and the MACD indicator is pointing in the wrong direction.  None of these points to a major trend change, since the longer-term moving averages are still pointing higher, but the relentless rise seems to be taking a break for now.

SPX, 6-Month Daily Candles, with 10-day Bollinger Bands, 50-Day Moving Average (blue), 100-Day Moving Average (yellow), and 12-26-9 MACD (bottom)

Source: Interactive Brokers

Importantly, there are signs of profit-taking in key market bellwethers.  We learned that Softbank exited its stake in NVDA last week, and that Viking Global Investors (among others) were reported today to have done so as well.  NVDA has been a key driver of this rally, and if major investors are taking profits in this key name ahead of its Wednesday earnings report, that should cause us to rethink the extent to which the AI-driven rally might need a pause.  And it is impossible to ignore the signs that are being sent by bitcoin, a popular speculative tool for many.

It would be risky to assert that a dip in a cryptocurrency, even one as popular as bitcoin, would be a driver for the broader equity market.  But cryptocurrencies in general, and bitcoin in particular, are good proxies for speculative enthusiasm.  And that enthusiasm seems to be waning.  While we just pointed out some minor deterioration in SPX, the deterioration in bitcoin has been quite substantial when we view it in the same way we just viewed SPX.  We see lower highs, lower lows, downward facing trendlines and an atrocious MACD.

Bitcoin, 6-Month Daily Candles, with 10-day Bollinger Bands, 50-Day Moving Average (blue), 100-Day Moving Average (yellow), and 12-26-9 MACD (bottom)

Source: Interactive Brokers

I must admit that I missed a “tell” recently.  A few weeks ago, I was asked to speak at a crypto conference in Stamford, CT.  I expected to be the “grumpy dad” who warned about paying premia for crypto treasury companies to a room full of young, eager believers.  Instead, I was around the median age.  That should have been a big “tell”, that the young crypto natives were replaced by a bunch of latecomers who viewed crypto as a portfolio tool, not as a specific source of value.  Those investors, many of whom were retirees or near-retirees, would be far less willing to HODL (hold on for dear life) than exit when the prospects shifted. 

Thus, if the speculative fervor that has driven so much of the recent investing climate is taking a break, so might the relentless character of the recent leg of the rally.  We’ll know a whole lot more after we hear from the likes of NVDA and Walmart (WMT) later this week.  Thursday will be the key day of reckoning, since those will bring not only the aforementioned earnings (NVDA post-close Wednesday, WMT pre-open Thursday), but also an overdue Payrolls report that morning.  Until then, let’s see if the dip buyers, rally sellers, or nimble traders remain in control.