Coiled Spring Capital Mid-Week Report 7/17/24

From last weekend’s report conclusion page:

“the current trend suggests selling large-cap leaders and reallocating capital to other market areas. We've been positioned accordingly for weeks, maintaining significant exposure to the Mag7, which has performed well. However, last week, we exited nearly all of those positions…we believe their best days are behind them, at least in the short term.”

And we went on to write:

“For weeks, we've anticipated turbulence in the second half of July and have de-risked a significant portion of our portfolio as planned. Sentiment is extremely elevated, the DeMark signals we've highlighted in recent reports remain relevant, and the market's previous leaders are showing signs of instability.”

Part of our rotation thematic was considering the other large caps, namely Dow Jones members. This excerpt is from our 7/7 report highlighting our view that the Dow would break out.

The Dow is now up almost +5% since that report and has forged a new all-time high.

We highlighted the S&P Small Cap 600 Index (SML) in mid-Jun as a way to consider playing performance catch-up with the large-cap leaders. Into today’s high, the SML Index is up almost 13.5%.

Our 7/11 report also highlighted that the Russell Small Cap 2K (RTY) was poised to break out if the CPI delivered. Before today’s reversal, the Russell was up +11%.

Mic drop time?

Since the beginning of the month, we have indicated that the seeds of rotation were starting to blossom but required a catalyst for growth. We initially suspected this catalyst might emerge during the end-of-month FOMC meeting. However, our mid-week report on July 10th suggested that the CPI could be the driving force of change.

Our prediction was spot on. Over the past week, the performance of our suggested rotation trade has been remarkable. Notably, the Magnificent 7 Index declined by over 7%, resulting in an outperformance of 1000-1600 basis points between the indexes within just one week.

Today, the market took a toll on latecomers. In our recent reports, we've warned that sentiment was overly stretched and that aggressive allocation to equities was unwise. When the market is primed for a downturn, it often only needs a small nudge to trigger a decline. While we can't predict the exact timing or catalyst, we can say that once the conditions were set, all it needed was a spark.

Here is the Bloomberg market wrap headline from today:

The Nasdaq has not seen a drubbing similar to today in 19 months.

Corrections are beneficial for the stock market. It had become overheated with overly exuberant participants boasting about their gains on social media. The key advantages of being adequately prepared for a correction are: 1) having fresh capital ready to invest at lower prices; 2) maintaining a clear mind free from losing positions; and 3) seizing the incredible new opportunities that arise.

Fortunately, we are in this enviable position.

When will the stock market correction run its course?

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