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

A popular song by Brittany Spears in 2000 keeps popping into our heads after today’s bloodbath in the stock market.

Why? Because it sounds better than “I told you so.”

Since the beginning of the month, we have been warning of a potential short-term top in the market for the 2H of July. We have been advocating for long positions to be sold/trimmed into the mid-July positive seasonality window. We even said to exit the beloved Mega-caps before their earnings as they were likely to show deceleration, in favor of SMID caps that should show earnings acceleration.

This is what we wrote in our 7/10 report before the CPI was reported:

Since our 7/10 report, the performance scorecard for the Mag7 (BM7P Index) and the rest of the major indexes, when compared to the SMID cap indexes is substantial.

Did we think the gap would be this wide? Of course not, but when the market systematically unwinds, it usually occurs faster and further than most anticipate.

We are purely tactical analysts, and our job is to keep our clients on the right side of the market, not advocate for how much of a drawdown might occur at some point in the future. We make suggestions on levels for move termination or targets to consider, but we need price information, among other indicators, to feel confident that a potential reversal can be sustained.

In our 7/14 report, we discussed downside levels for the major indexes:

For the SPX our two downside targets were 5500 and 5375-5409. Today, it closed at 5427.

Excerpt below:

For the Nasdaq, we highlighted the move targeting the 17345-17490 range. Today, it closed at 17342.

Here is the excerpt:

In last weekend’s report, we were quite clear that we thought the market had more downside before finding a floor.

From our conclusion page:

Today, the SPX lost over 2% and the Nasdaq over 3%. The total drawdown from the peak eight days ago for the SPX stands at -4.4%, while the Nasdaq has declined over -7% from its peak nearly two weeks ago.

Anticipating and sidestepping a significant drawdown is a challenging task, and we are proud of our call and the money we saved our clients.

So, where does this leave us? Are we out of the woods, and should we start buying the dip?

We still have the bulk of earnings season to get through, a looming PCE report this Friday, and the upcoming FOMC meeting. The bond market has experienced significant steepening, now at its highest level since 2022, which is likely adding to the anxiety in the risk markets. Remember, a steepening yield curve can signal a potential recession. While we don’t necessarily subscribe to that thesis, the current fragile environment means any negative data point can easily be blown out of proportion.

For one, earnings have not been particularly strong, which could hinder any potential reversal until the next market-moving data point. Among SPX companies that have reported, profits have beaten estimates by the smallest margin since the end of 2022, while sales surprises have been the worst in at least two years, according to Bloomberg.

The PCE is forecast to slow from 2.6% in May to 2.4%. We don’t see this as market moving but it should give the FOMC air cover to talk up a rate cut for the September meeting.

Adding to the case for further downside, CTA thresholds have been breached, triggering more systematic selling. According to Goldman Sachs, approximately $33 billion of global stocks could be unwound, with roughly $8 billion coming from the US market.

If you want to stay on the right side of the market and avoid costly drawdowns, or conversely know when the waters are safe again for buying, consider subscribing below. We’ll help you keep more of the money you earn in the stock market by capitalizing on the inherent volatility swings.

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