Introduction

Our June 3rd report, Momentum Cracks?, should have left little room for interpretation. The momentum trade was showing signs of fatigue, we highlighted the growing risks, and we had been advocating selling into strength for weeks. By now, the reason should be obvious.

Not only did we identify the top to the day in our June 1st report, but we reinforced that view on June 3rd, specifically citing the earnings reactions to Broadcom and CrowdStrike as potential catalysts for a momentum unwind. As we often remind readers, risk tends to build gradually and then emerge all at once.

Thursday's earnings reactions appeared manageable on the surface, lulling many participants into a false sense of security. By Friday, however, the delayed response arrived with force. The Nasdaq 100 fell approximately 5%, while the Semiconductor ETF (SMH) declined nearly 10%. For an index ETF, a 10% drawdown in a single session is significant and painful for those who were not prepared.

We believe that call deserves recognition. It is difficult to find another research service that identified the setup, the catalyst, and the timing with such precision.

A few excerpts from the June 3rd report help illustrate the point:

The opening sentence of the report stated:

"Our weekend (6/1) report focused on selling strength as DeMark signal alignment continued to emerge across the major indexes."

Regarding the Broadcom and CrowdStrike earnings reports:

"The question now is whether this finally takes some air out of the momentum trade. The market certainly appears set up for it."

"It is entirely possible that the AVGO and CRWD earnings reactions serve as the catalyst for a wave of momentum selling that helps relieve some of the recent euphoria."

Referencing our SPX versus Nasdaq comparison chart dating back to the Internet Bubble:

"If momentum is going to lose leadership, it will probably start around here."

On the broader momentum trade:

"We are simply highlighting that momentum has become crowded, extended, and increasingly difficult to sustain."

Highlighting Bitcoin as a leading indicator:

"Bitcoin is not helping the bullish case. As we discussed over the weekend, it continues to act as a potential canary in the coal mine... It is possible Bitcoin is setting the stage for a broader volatility event."

And we concluded with the following:

"Over the weekend (6/1), we advocated increased caution and described the market as vulnerable to a pause or retracement. As readers know, DeMark signals often just need a push. Maybe the disappointing reactions to a pair of bellwether technology earnings reports, combined with reflating oil prices, higher yields, and a strengthening dollar, are enough to finally arrest the relentless ascent and inject some volatility into an increasingly euphoric market."

We are not sure we could have been much clearer.

If Friday's decline caught you off guard, our reports were pointing directly toward the risk. This is exactly why we focus on identifying shifts in market character before they become obvious. The objective is not to explain market moves after the fact. It is to position for them beforehand.

Moving on.

One of the most common questions we received after Friday's decline was simple: Why?

The reality is that investors spend far too much time trying to rationalize individual market moves. In our experience, that is rarely productive. The explanations almost always arrive after the move has already occurred.

Markets are discounting mechanisms. By the time a narrative becomes widely accepted, prices have often moved substantially. That is why our process is designed to identify subtle shifts beneath the surface before they become consensus.

And there were plenty of signs that conditions were changing.

For example, in our June 3rd report we highlighted the U.S. Dollar Index (DXY) as being on the verge of a breakout.

Here is the excerpt:

The DXY breakout we highlighted on Tuesday finally materialized on Friday, adding further pressure to an already vulnerable market and helping trigger the sharp selloff in equities.

Likewise, we have been discussing stubbornly high interest rates for weeks as a growing risk to risk assets. Recent economic data continued to point toward a more hawkish backdrop, leading us to note that the market was increasingly vulnerable to a repricing of rate expectations. In fact, we specifically suggested that Friday's payroll report could provide the catalyst for yields to move even higher.

Here is the excerpt from our June 3rd report:

The 2-year Treasury yield rose another 10 basis points on Friday, closing at its highest level in four months. As we have been discussing for weeks, higher yields remained a key risk factor for an increasingly extended and momentum-driven market. On Friday, that risk finally mattered.

Friday's payroll report was indeed stronger than expected and ultimately proved to be the catalyst that broke the market. At first glance, that may seem counterintuitive. Shouldn't a stronger economy be bullish for stocks?

In theory, yes. But the market is currently more concerned about inflation than growth. A stronger labor market raises the risk that inflation remains sticky, keeping the Fed on hold for longer—or even reviving discussions of additional tightening.

Interest rate forecasts are now pricing in a full rate hike by December. As those expectations adjust, investors are forced to reprice assets for a different policy path. Technology stocks, as long-duration assets, are particularly vulnerable to the resulting valuation compression.

This is why technology and other momentum-driven stocks were hit hardest on Friday.

It's possible the stronger-than-expected payroll report was influenced by temporary hiring related to World Cup preparations and that the strength fades as the summer progresses.

Frankly, we don't care.

We are not in the business of debating why the market moved after the fact. We are in the business of identifying risk before it becomes obvious and preparing clients for the outcome. In this case, we believe we did exactly that.

The DeMark signals timed this momentum unwind with remarkable precision, which is precisely why they remain a core component of our process. They provide an additional layer of risk management when conditions beneath the surface begin to deteriorate.

As we often say, don't ride motorcycles without a helmet.

We provide the helmet.

Now let's check the charts.