Momentum Monday – Does The Bleeding Turn Into A Code Red?

Tech is under pressure again. QQQ made a lower high a few weeks ago and renewed its descent. SMH weekly chart might be working on a giant head-and-shoulders bearish pattern. Semis leaders are getting obliterated and they can’t even stage a brief bounce. The ones that bounce are getting faded.

The market expects a rate cut in September. It’s a given. The only question is 25 or 50bps and the outlook for further cuts that the Fed will provide. In the recent past, the anticipation of a rate cut was a tailwind for small caps, regional banks, biotech, and homebuilders. Not this time around. Only real-estate-related stocks showed some strength on Friday but nothing to write home about. The rips are getting faded there as well.

In the meantime, bonds of different durations are rallying. Long-term treasuries (TLT) are setting up for a potential breakout near their 52-week highs. Before 2022, they were the go-to safety play when the market would pull back or there was a recession threat. This narrative went upside-down during the rate hike cycle in 2022 and 2023. Things are back to normal as the market is expecting numerous rate cuts ahead and the economy has slowed down.

Corrective markets require a different state of mind to trade them profitably. Choppy price action is typical for a downtrend – upside gaps in the indexes are sold; downside gaps in the indexes are bought. Earnings upside gaps in individual stocks fade on day one or don’t lead to follow-through for more than a day or two. Downside earnings gaps continue lower.  You don’t have to be overly active in such an environment but if you have to – approach it tactically and be nimble as any gains can reverse quickly.