Stock Market Commentary
Today was a brutal day in the stock market. The only good news I can report is that market breadth finally dropped into my official oversold territory. However, “so what?” sounds like an appropriate question to ask in the face of deepening market angst over tariffs. For example, a headline from Yahoo Finance read that today was the worst market event since 2020. On the flip side, Bloomberg reported that “Retail Traders Step In to Buy as Others Flee in Tariff Rout“:
“Through the first three hours of trading, retail investors were net buyers of $2.8 billion in stock, the second highest level on record since JPMorgan Chase & Co. began tracking the data a decade ago, according to Emma Wu, the bank’s global quantitative and derivatives strategist. The buying ranged from ETFs to single stocks, with ETFs tracking the S&P 500 seeing the same level of inflows as Nvidia and Tesla Inc. combined…Meanwhile, hedge funds dumped global stocks at the fastest rate in 12 years in March, according to Goldman Sachs Group Inc. data.”
At least I understand why the market kept selling off and closed at the lows. Market makers are likely going to try to shake these stubborn buyers out of their positions at lower prices.
Anyway, I have long wanted better data on the selling dynamics in the market. “Everywhere” I turn, the advice to retail traders and investors is consistent: do not panic (including here). “Buy the dip” has become standard advice, and now, in extreme situations, it becomes “extremely buy the dip.” This approach has worked well in the past, so I understand the near automatic buy responses.
Still, I am wary despite the market triggering bullish oversold conditions for me. When I see nearly every financial personality on YouTube and social media repeating the same advice—stick to the plan, buy quality companies, etc…—I question who exactly is doing the selling if everyone is supposedly holding and buying. Some may blame algorithms or market makers manipulating stocks, but someone is on the other end—even if the robot is selling on behalf of a human.
I am a contrarian by nature, so I feel at odds with wariness at such an extreme in market fear. I am keeping an eye out for any evidence that this time is indeed different. For example, in my last blog post, “Time for a Tariff Crash Trading Plan“, I outlined reasons to stay alert to the possibility that this moment marks a true change in the global economic structure. If the U.S. is indeed restructuring the global economic order, then the odds for massive downside risks remain salient.
And of course, conditions on the ground could change rapidly. One day the U.S. could flip the switch and claim it wants a return to normalcy…which of course would be hard to believe or trust at this point.
Jamie Dimon’s “get over it” soundbite on tariffs two months ago at Davos did NOT age well!
The Stock Market Indices
S&P 500 (SPY)
The S&P 500 suffered a massive 4.8% drop, breaking below what I labeled the market’s “first area of agitation.” The index gapped down just below the bottom of this range. The index dropped below its September low and is now trading at levels last seen in mid-August, when volatility also spiked in historic fashion. The downtrending 50DMA is now rapidly converging with the 200DMA. When a rally occurs, the price action will face stiff resistance at this level, especially since it will roughly coincide with resistance from the close on election day.
From a technical support standpoint, the August low is one downside target. However, given how oversold the market is, I expect a rebound before a test of that level. I am still holding my “disaster” S&P 500 June 520/500 put spread. That position is now profitable…but not nearly enough to make me feel better on a day like today!
NASDAQ (COMPQ)
The NASDAQ remains in worse shape than the S&P 500. The tech laden index is now just 400 points from the conventional bear market line—20% off its all-time high. This level happens to coincide with the support level I was previously watching from the former all-time high in 2021.
Unless the new economic order is completely discarding big-cap tech, the NASDAQ appears more interesting as a trade during these oversold conditions. Today’s 6% drop was shocking. The NASDAQ also traded well below its lower Bollinger Band (BB), a classic signal of extreme selling pressure.
The iShares Russell 2000 ETF (IWM)
IWM dropped 6.4% today, officially breaking into a conventional bear market and returning to levels last seen in January 2024. I was bullish on small caps starting last year (thanks permabull Tom Lee!). The trade worked fantastically after a while, but that game officially hit the reset button with today’s conventional bear market plunge. Still, I bought a call spread on IWM today per my standard practice, but I plan to leave IWM alone moving forward. There’s too much downside risk between current levels and the pre-pandemic highs. I will get interested again above the bear market line.
The Short-Term Trading Call While Wondering So What?
- AT50 (MMFI) = 19.3% of stocks are trading above their respective 50-day moving averages
- AT200 (MMTH) = 28.5% of stocks are trading above their respective 200-day moving averages
- Short-term Trading Call: bullish
AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, closed at 19.3%, official oversold territory. Per the AT50 trading rules, I flipped bullish for short-term trades. AT200 (MMTH), the percentage of stocks trading above their respective 200DMAs, dropped to 28.5%. This longer-term indicator of market health is approaching its 2023 lows. If the market hits a true market extreme, AT200 could test the 2022 lows. This stark reality reflects significant downside risk.
Given all the dire and ominous signs, so what if AT50 is oversold, right? Well, history has told me that at market extremes, technicals tend to dominate most strongly with AT50 providing a structured guide for cool, calm, and collected trading. Particularly under these conditions, I prefer to follow the rules than follow the news. Still, I remain quite deferential to the overall bear market by maintaining low expectations for oversold bounces and anticipating stiff overhead resistance levels.
The volatility index (VIX) spiked to 30.0, setting a new high compared to all spikes since last summer. I do not want to try to guess how high the VIX can move through the overhead “white space”. The VIX spiked to 66 last August, so I would rather wait for a volatility implosion—a “fever break”—before aggressively buying. If the VIX somehow makes it back to 66 or so, I will also have to assume the fever is about as close as it can get to breaking.
I traded very little today, but I had to take a fresh nibble somewhere. So, I shorted volatility with a weekly VXX $50 put option expiring in 2 weeks.
The Equities: So What?
Apple (AAPL)
I was sooooo tempted to buy AAPL today given its mind-boggling 9.3% drop. However, this move did not even take AAPL to a new 52-week low. The stock looks like it is retracing gains from the rally off last year’s WDC in June. Psychologically and technically, Apple could fall much further. Note that AAPL cracked the closing low from last August.
Best Buy (BBY)
I focused most of my attention today on the indices. Whenever I peeked at individual stocks in harm’s way from tariffs, I found similar carnage. Electronics retailer BBY plunged 17.8% to a 5-year low. The stock barely snuck by previous lows that stopped short of the pandemic crash low. BBY is a stock that I know too well to leave alone at these levels. I plan to start nibbling tomorrow and just brace for a potential test of the pandemic lows at $50.
Dollar General (DG)
While tariff carnage took down a wide swath of retail stocks, I was blown away to see Dollar General (DG) pulled off a bullish breakout above its 200DMA! I took profits on my call spread yesterday as a pre-tariff precaution at 200DMA resistance. Even Dollar Tree (DLTR) was rejected at 200DMA resistance. Needless to say I remain bullish on DG. It is now a buy the dips until/unless it slips below its 200DMA again.
Caterpillar, Inc (CAT)
I also mentioned Caterpillar, Inc (CAT) in my previous post. I failed to mention that I consider CAT my biggest miss in this tariff trauma. Long-time readers know CAT is my favorite hedge against bullishness. Yet, I did not have any put options in place yesterday. All I could do is watch and wonder what could have been as CAT sold off the entire day to a 14-month low. I should have stopped watching because I eventually let myself get pulled into a very late stage hedge with a $300 calendar put spread. The short side expires tomorrow.
Anyway, the U.S.’s current tariff policy is supposed to help industrial companies. So far, no dice. The SPDR Select Sector Fund – Industrial (XLI) fell 5.4% to an 8-month low.
Be careful out there!
Footnotes
Subscribe for free to get email notifications of future posts!
“Above the 50” (AT50) uses the percentage of stocks trading above their respective 50-day moving averages (DMAs) to measure breadth in the stock market. Breadth defines the distribution of participation in a rally or sell-off. As a result, AT50 identifies extremes in market sentiment that are likely to reverse. Above the 50 is my alternative name for “MMFI” which is a symbol TradingView.com and other chart vendors use for this breadth indicator. Learn more about AT50 on my Market Breadth Resource Page. AT200, or MMTH, measures the percentage of stocks trading above their respective 200DMAs.
Active AT50 (MMFI) periods: Day #326 over 20%, Day #4 under 30% (underperiod), Day #23 under 40%, Day #35 under 50%, Day #62 under 60%, Day #163 under 70%
Source for charts unless otherwise noted: TradingView.com
Full disclosure: long SPY shares and put spread, long AMZN
FOLLOW Dr. Duru’s commentary on financial markets via StockTwits, BlueSky, and even Instagram!
*Charting notes: Stock prices are not adjusted for dividends. Candlestick charts use hollow bodies: open candles indicate a close higher than the open, filled candles indicate an open higher than the close.
* Blog notes: this blog was written based on the heavily edited transcript of the following video that includes a live review of the stock charts featured in this post. I used ChatGPT to process the transcript.