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The consumer price index report out Thursday is supportive of a soft landing. We’ll see if it turns around this recent swoon in the stock market. There’s an old saw on Wall Street: in corrections it takes a lot longer to lose the first 5% because people buy the dip. The second 5% comes a lot quicker. The S & P 500 is now down six of the last seven trading sessions. Still, it’s only 3% off its recent highs. Why does it feel worse? Maybe it’s because everyone keeps trying to buy the dips, and it’s not working. “Definitely no panic,” Chris Murphy, co-head of derivative strategy at Susquehanna International Group told me. “If anything, feels like a lot of people want to buy a 5-10% dip. Every day this week, the S & P has rallied in the afternoon.” Still, the short-term trend is down. There’s a pattern of lower lows, and lower highs. On the surface, there doesn’t seem to be a large problem. Volume is seasonally light. Volatility is muted. The macro data (China excepted), including today’s CPI, has been supportive of the soft landing. What’s up with the tech trade? Still, the technicians are starting to squawk, particularly about tech. The Nasdaq 100 ETF (QQQ) is below its 50-day moving average. Nvidia, the big gainer for the year, is also below its 50-day moving average. Microsoft, which has rallied 35% this year on its investment in ChatGPT parent OpenAI, was at its lowest level since late May on Wednesday. What’s up with the tech trade? Eric Johnston, head of equity derivatives and cross asset at Cantor Fitzgerald, told me there is a reality check going on after big run-ups earlier in the year. “AI euphoria is falling as very few companies are actually making any incremental revenue off it and market is now seeing that,” he said. Tech weakness has been offset by strength in health care, energy and pharmaceuticals. The biggest risk seems to be rising yields. It’s a two-edged sword: higher yields are a validation of the recovery, but it’s tough on tech stocks. Cash on the sidelines A pullback in tech seems understandable given all the AI hype. The other issue is that everyone has switched camps to the bull side. “Positioning is now fairly long and sentiment bullish,” Johnston told me. The biggest issue, which has been an issue for a long time, is nobody finds the rest of the market very compelling at these prices. “Seeing lots of retail cash on the sidelines,” Anthony Denier, CEO of retail trading firm Webull told me. “Especially since they are earning 5% during a quiet tape and in vacation mode. Demand for treasury products still high and single stock investing remains muted,” he said. Right. There’s a huge swath of investors that seem perfectly happy to collect 5% yields on their 1-year Treasuries, market rally be damned. There’s $6.7 trillion in money market funds. That is serious competition for stocks. While the stock weakness is notable, “trends have not gotten bad enough to think this extends throughout August, either,” Mark Newton at Fundstrat told clients last night. “I suspect a low is right around the corner. However, proof is needed.”
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