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Introduction

The market has behaved almost exactly as we anticipated.

Over the last two reports, we called for a momentum reversal, identified Wednesday as the likely peak, and suggested that initial bounce attempts would struggle to gain traction. Thus far, that roadmap has played out remarkably well.

The Nasdaq 100 Index (NDX) has now declined approximately 8% from peak to trough in just four trading sessions. By any measure, that is a meaningful correction, particularly given how complacent sentiment had become. Many investors were likely caught offside by both the speed and magnitude of the move.

Recall what we wrote in our May 31st report: "Risk happens slowly, then all at once."

Four trading days and an 8% decline later, that observation seems particularly relevant. While the indexes have experienced a sharp reset, many individual momentum stocks have already suffered drawdowns of 20-30% from their recent highs.

The good news is that markets do not move in a straight line. The bad news is that technical damage of this magnitude is rarely repaired in a matter of days. The key question now is whether this is merely a corrective pause within an ongoing bull market, or the beginning of a deeper adjustment in leadership and valuation expectations.

Let's take a look.

All of this has unfolded over the span of a week, underscoring the value of paying attention to the specifics of our bi-weekly analysis. Markets can change quickly, and when they do, positioning matters.

The technical damage inflicted on the major indexes is real and not something that typically reverses overnight. Combine that with challenging seasonal tendencies, a growing list of potential macro catalysts, and the ongoing uncertainty surrounding Iran, and the setup points toward a potentially difficult and frustrating summer for investors.

Many market participants have been conditioned to buy every dip. While we remain firmly in the buy weakness camp, that does not mean investors will be rewarded immediately. As we often remind readers, technical damage is repaired through one of two mechanisms: time or price.

In our June 7th report, we argued that price was the more likely path forward:

"Our initial inclination is that additional downside remains likely, possibly after a short-lived bounce. One-day volatility events of this magnitude rarely resolve themselves immediately. More often, they leave behind technical damage that must be repaired through either time or price. In this instance, we believe price is the more likely path..."

At the same time, we also emphasized an important distinction:

"...we do not view the current environment as uniformly bearish. Market internals suggest rotation is occurring beneath the surface rather than indiscriminate liquidation..."

We provided evidence of that rotation in the June 7th report, despite the NDX suffering a 5% decline that day. Since then, the bifurcation beneath the surface has only become more apparent. Technology and momentum stocks have absorbed the bulk of the damage, while defensive sectors have assumed leadership.

That is exactly what we would expect in a risk-off environment, where capital seeks safety rather than exits the market altogether.

The broadening is even more apparent when looking at participation metrics. Despite the recent index decline, the percentage of stocks trading above their 10-day, 50-day, and 200-day moving averages continues to rise.

That is consistent with rotation and improving breadth, not broad-based liquidation.

That offers little comfort to those who FOMO chased the market's hottest groups, most notably Semiconductors. The sector has already endured a roughly 10% peak-to-trough decline and, based on the current technical setup, appears vulnerable to additional downside.

The catalyst-heavy calendar was one of the reasons we suggested a pause or retracement was becoming increasingly likely. Attention now shifts to Friday's pricing of the highly anticipated SpaceX IPO, which Bloomberg reports is approximately four times oversubscribed.

How the market digests the largest IPO in history could prove important, and we suspect the risks are skewed to the downside. The offering has already been cited as a reason for portfolio inventory harvesting, potentially contributing to the recent weakness in growth stocks. With OpenAI and Anthropic also filing to go public, the pipeline of large capital-raising events is growing, creating an additional incentive for investors to monetize existing winners.

The recent market downdraft has also been fueled by the deteriorating ceasefire situation in the Middle East, a risk that we would argue was too cheaply priced by volatility markets. After highlighting the DeMark 9 buy signal on the VIX in our June 3rd report and suggesting volatility was poised to expand, the VIX has since surged roughly 40%, reaching the resistance zone we previously identified.

The question now is whether that resistance holds, or whether volatility is preparing for another leg higher.

Lastly, Wednesday’s CPI report was undeniably hot on the surface, with headline inflation accelerating to its highest level in three years. However, the underlying details were somewhat more encouraging. Core CPI rose just 0.2% for the month, below expectations, suggesting inflation pressures outside of energy remain relatively contained. Much of the headline increase was driven by higher energy prices stemming from the ongoing Middle East conflict.

That offers some encouragement should the Iran situation eventually stabilize and energy prices retreat. For now, however, the report has done little to alter Fed Funds expectations, with markets continuing to anticipate a restrictive policy backdrop despite the softer core reading.

Should core inflation remain contained, the recent monthly gains are largely consistent with the Fed's 2% inflation target.

The titles of our last three reports were not accidental: Momentum Cracks?, Momentum Beatdown, and Momentum Unwinding.

The message was clear. We identified the cracks, warned of the unwind, and highlighted the catalysts capable of triggering it. We hope readers were paying attention.

Now let's see what the charts have to say.