You can argue the merits of relying on a groundhog to determine the length of winter.
That doesn't change that every year, one way or another, people let headlines about shadows make them happy or sad.
Well, it's starting to feel like something similar is going on with U.S. secretary of treasury Janet Yellen.
Every trading day recently has coincided with a headline about Yellen's shadow, as she plays metaphorical hopscotch between backstopping banks or not.
Ironically, every time Yellen speaks, it convinces me there's going to be another six weeks of this bear market - the trader's winter, if you will.
Yesterday, she said they were "not considering blanket insurance for all U.S. bank deposits."
We talked extensively about the effects that had on the market.
Well, last night, while the market was getting absolutely steamrolled, we saw the following...
The most important words in that sentence are "if warranted."
And while the market was busy reacting to the shadow she cast with that latest headline, it was distracted from the thing that actually mattered
we've talked about the dueling narratives between Yellen and Jerome Powell and how it is only further stoking the fires of uncertainty in the market.
People don't know who to listen to and what to believe.
But last night, after Yellen's latest headline, there was a five-minute stretch where there was nothing but buying going on.
It looked like the Chicago River last weekend for St. Patrick's Day. Literally nothing but green.
However, as I said, it was only about five minutes before things started to roll back over.
The most important thing, though, is what rolled back over. Because that is information that reveals a lot about the state of the market now and moving forward.
Sure, large-cap technology was having a day, but everyone else... not so much. And while everyone was watching the Banks, very few people were watching this.... the iShares Russell 2000 ETF (IWM).
On yesterday's show with Voz, I talked about $171 as the most critical of levels that I gave you to watch because breaking that meant the risk-on trade is now dead.
I said, if we break this $171.35 mark, then we have to hold the $170, otherwise, we're looking at the next round of selling that encapsulates the rest of the market.
The reason it's so key is that, if it's broken, then the small-cap risk is taken out of the market.
Now, you might be looking at the above chart and thinking this is nothing more than a fluctuation within a given trading range. The same thing happened in October!
Well, there's no better proof of why that's wrong that than the following chart...
This is a chart that measures the IWM's relative strength against that of the S&P 500.
Whenever we are below 1.0, that tells you that the risk-off trade is gone. It fell below that on February 10, and it's been 18 trading days since then.
We're now matching what we saw in May 2022, in other words, we're digging down, and the risk-off trade is off.
This is far more than just a trading range. It tells us that in the case of the small caps, we are now slipping below the previous point of "support" from a relative strength basis that we saw back in May.
That means that we're going to start seeing a bit of a deeper dive on the IWM, and it's just going to be one more fire that pops up down the street from the banks.
Now sure, the banks are wreaking the most havoc, but the fact that the IWM has been making this sneaky move lower while everyone is watching the banks, well.... That's just not good.
This puts the market on peril watch for a good two weeks at least - possibly as many as six.
I'm not sitting here telling you that the market is about to go down every day for the next six weeks, but I am telling you that by the end of the road - whether it's two weeks or six - the market's going to be down another 10-20%.
So, it goes without saying that I'm looking at trades that coincide with that timeline.
Screw the weekly options that expire next week, and screw the April options, I'm opening up May options.
Let the market do the work for you.
And one of the key sectors for the economy flashed a technical warning sign yesterday, as my technical model was overloaded with signals from the discretionary and retail sectors.
Consumer discretionary, financials, industrials, health care, technology, utilities...
Usually, I look at anything around or over 15, and that's often only one or two sectors at a time that I see a signal from.
This time, it was a collective group of signals that represent a big cross-section of the market.
The financials started the fire, but now all of the other streets on the house have smoke coming from them.
But while the smoke is coming out of these kitchens, everyone is over in the Invesco QQQ Trust Series 1 (QQQ) house watching March Madness, because it's the "safe house."
But with five stocks comprising roughly 40% of the QQQ's activity, one has to wonder just how long it remains safe, especially with earnings coming up in the not-so-distant future.
That's why I'm watching Apple Inc (AAPL), Microsoft Corp. (MSFT), Amazon.com Inc (AMZN), NVIDIA Corp. (NVDA), and Alphabet Inc. (GOOG and GOOGL) very closely.
So, with the Nasdaq 100 and QQQ serving as the relative safehouses, we're going to start getting very familiar with the following chart.
Don't worry, I'll have this up on the screen every day moving forward....
Because just like the IWM and the relative strength, this is going to give you what you need to know on when it's time to get out of the Qs.
I don't care that four or five companies make up the majority of the QQQ - it doesn't make those companies bulletproof.
Frankly, in times like this when everyone is backing up their trucks to buy them in bulk, it makes them riskier.
There are still 95 other companies in that index, and if all of those start going down, you better believe the top five are going to be feeling the heat.
With 45% of companies trading at or above their 50-day moving averages (MA50), we are right in that sweet spot.
When we were monitoring this chart for the S&P 500 a short while ago, it bobbed around at that 45% level for a week or two, and then it started to roll over. Now we're at about 28% on the S&P, and I'll buy when we get to single digits.
This should happen the same way here.
If we see it break down toward that 35% level over the next couple of days, I'm telling you, you're going to see the next leg down on the QQQ.
This is getting ready to go from neutral to bearish.
As far as the areas that I'm watching as a result of all of this newfound bearishness, I'm looking into the consumer discretionary sector - particularly retail.
We just saw headlines that Walmart is going to be laying off hundreds of workers at one of their e-commerce facilities. At its core, fewer people needed to fulfill online orders tells me there are fewer people buying things online.
That signals trouble for the sector as a whole.
These are the tickers in the retail sector that my systems and momentum tell me are at risk of a 15% drop in the next two-to-four weeks...
But it's going to be crucial to stay hyper-focused on these and make sure you don't miss the signals. Things could happen fast when the action starts.
Now, if you don't hear me talk about it every morning show, that's OK - I assure you I'm keeping tabs on it all and am on top of it.
Unfortunately, because of the nature of the news cycle and the market, things come up that require attention during that 45-minute stretch.
That said, one way to guarantee you don't miss the moment I strike on these names (and others) is by joining my Night Trader service.
Click here to learn more and subscribe today.
The post The entire market is focusing on the wrong thing appeared first on Penny Hawk.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.