I had this funny vision in my head this morning...
Janet Yellen rolls over in the middle of the night after hearing her phone give a gentle "ding".
She pulls the phone off her bedside table, and it immediately opens to her alerts after recognizing her face.
By the way, in my vision she's using an Apple iPhone "X". She's been holding out on the upgrade.
Her eyes immediately go to the green "Credit Karma" alert badge, which she swipes.
Wiping the sleep from her eyes, she looks at the time... thinks about calling Timothy Geithner... but just tosses the phone in the laundry hamper near the bed and rolls over to resume her sleep.
She murmurs "At least it's still stable" as she drifts back into her slumber.
She slept fine by the way.
Why? Secretary Geithner knows.
We've seen this before.
It was August 5, 2011. Credit Karma wasn't around so I imagine that Secretary Geithner's bedside "Princess" style phone pierced the night with its ring.
He answered to hear that S&P was dropping their rating on the U.S. Debt from AAA to AA+ with a negative outlook. It was just a scant three days after Moody's put the U.S. on a negative outlook.
The reason? The Government's inability to manage its finances. The shifts also came after Congress struggled to raise the debt limit AGAIN.
The funny thing is, if you ask most people, they assume that S&P brought our credit rating back to AAA. They haven't. Today's rating sits at AA+ with a stable outlook. That may be likely to change.
You see, the credit rating agencies have been nudging the U.S. Government for the last few months. This shouldn't have been a surprise.
But the market needed this, and here's why...
Fitch warned everyone on May 24, 2023, when they put the U.S. on "Negative Watch".
DBRS Morningstar put us on "Negative Watch" the following day.
Ironically DBRS Morningstar just moved the U.S. back to "Stable" last week while Fitch decided to go the other way with a downgrade.
All the while Standard & Poor's rating hasn't changed since 2011. Even after the government performed a public colonoscopy on their operations in the name of the housing crisis. History would show that they deserved it, but it would also show that the root of the problem came right back to the halls of Congress and the changes to banking regulation that helped build the housing crisis.
S&P was complicit in the housing crisis.
Let's focus on what's important, the market's reaction today, and what you should expect for an opportunity.
Today, the market is making the expected move. The Nasdaq 100 is down 2% while the S&P 500 is trading lower as well.
All the leaders are taking a haircut this morning, but it's not because of the credit downgrade.
The downgrade was the "trigger". The cause is more technically entrenched.
It's been exactly 71 days since the S&P 500 saw a decline of 1% or more. That's the longest streak since the S&P 500 went 111 days without a 1% down day ending January 27, 2020.
Read the above quickly again and you'll realize the market is simply tired of going up.
In 2022 the S&P 500 averaged a one percent decline every 5.6 days. It finally got "tired of going down".
In addition, we're heading into the seasonally weak August and September months.
I've harped on this for the last few weeks for a reason, seasonality happens for a reason.
At its core, it's a "psychology of trading" phenomenon.
Think of it as the market's "Placebo Effect".
If investors think it works, then it will work more often than not.
Here's what the last 20 years of monthly average performance for the Nasdaq 100 looks like.
For the record, This July's return on the Nasdaq 100, 3.8%. Just a little over the average, but you know where I'm going.
In addition to seasonality, the market has stretched its limits on momentum and breadth.
The percentage of companies trading above their 50-day moving averages in the S&P 500 crested at 90% last week.
Historically, this is an indication that the market needs a break as the average reading (in a bull market) of this percentage hovers around 60-70%. Here's the current chart.
So, in fact, the seasonality placebo and stretched momentum/breadth had already set the stage for a much-needed decline.
Here's where the opportunities lie.
Accept the fact that the market NEEDED a 5-10% healthy correction.
The Nasdaq 100 is set for a potential move to its 50-day moving average as part of that healthy correction.
The last downgrade of the U.S. debt by S&P in August 2011 resulted in a 15% drop in the Nasdaq 100. A similar drop would take us lower than the 50-day for a short down to the QQQ's 200-day moving average. That's a 17% drop from yesterday's close and the point where the longer-term bulls will buy the market with vigor.
If you're somewhere in between, here's your plan.
Step One: Use the Nasdaq 100 (QQQ) $365 as your trigger for a first round of buying November options. I say November because you also must remember that both August and September are volatile and poor-performing months.
Step Two: If the Nasdaq breaks through the "trend" (50-day moving average) then set your sights on another round of call buying at $310.
This is where the tech-heavy index will look for strong support as both traders and investors start to focus on the prize... a fourth-quarter rally that takes the market to new highs before we're singing "Auld Lang Syne" in the opening minute of 2024.
Step Three: Remember that there is an unbelievable amount of capital that is looking to enter the market before this trend continues.
Hedge funds and other institutional investors just started warming up to the market. They're chomping at the bit to "buy the dip".
This is your opportunity to get ahead of that wall of cash.
I can't wait to get back to talking about earnings tomorrow. We'll hit two Best in Breed stocks ahead of their earnings report.
Wishing you all the best trading success,
CJ
The post This is the pullback Trigger the Market Needed 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.