Tuesday's sharp comedown in the averages reflects a market still in the throes of discounting an economic slowdown/recession.
Over in the bond market, the widely-watched spread between the yield on 2s and 10s has flattened to only 4 basis points from about 10 last week. A flat yield curve is indicative of a market looking for slower growth into '23.
The breakdown in cyclical stocks, especially commodity cyclicals, also reflects a view among market participants that a recession is around the corner. Why else would cyclicals be sold while defensive sectors like consumer staples and healthcare show relative strength?
Within the growth stock complex, outside of a few EVs, solars, and biotechs, not much is stirring to the point where it becomes attractive. This is important from a market health standpoint. The speculative sentiment, which showed signs of at least being on a light simmer last week, has flickered out.
We have been speaking about Li Auto (LI) as the best actor in the $13+ market, and one in which we would monitor for a possible pullback entry. Today, the stock neatly touched the 9 ema and bounced to close well. For two reasons, we will pass on Li at this juncture despite its handsome pullback:
1) the stock is too strong (read: extended) to allow for an attractive reward-risk ratio, and 2) Tuesday's market decline now has the averages facing a headwind. Click to zoom in.
In summation, Tuesday's comedown was important, as it turned the trend from up to down. While it is possible this is merely a two-bar pullback in a new up trend, the action in leading stocks does not support this thesis. Let's sit tight for now and make sure we are protecting precious capital.
Introduction to the service (38:00)
Money management and risk management (20:27)
Bread and butter pullback (11:10)
Bread and butter pullback: Pt II (15:09)
Bread and butter pullback: Pt III (31:48)
Bread and butter pullback: Pt IV (30:16)
Wyckoff spring reversal (2:30)
5-minute breakup test (8:01)