Wk43 Signal Alert - Buy the dip?
Starting from a macro level via our liquidity indicator - based on the relative movements of real yields versus inflation expectations, we can see deteriorating liquidity (tightening of financial conditions) and NDX to trade in a range with a slighly bearish bias through September. That trend diverged as NDX later broke out to the upside as liquidity conditions continued to tighen. But what's interesting at this juncture is NDX retesting the range from which it broke out from as liquidity conditions are improving.
The cause of that NDX selloff and loosening of financial conditions was AI profitability/credit fears which though not completely unreasonable, I do think it has gotten a little carried away as we are in the early innings of a massive AI infrastructure build out that is likely to continue for the years ahead. The market has a habit of 'overshooting', and I think that's exactly where we are with 'AI fears' which is why I think markets can stabilise for the time being. Whether sentiment can turn more optimistic from here will depend on how Q3 earnings season pan out - SPCX results last night has some impressive details and META tonight will be another test of whether there is sufficient ROI after making massive investments.
The AI selloff has caused the market to rotate defensively out of Tech stocks with XLP and XLV the biggest beneficiaries and trading near their 52-week highs.
But we are now seeing some fairly strong signals of those rotations arriving at an inflection point. At the factor level, we see trend-exhaustion signals on the growth and value index as well as on the ratios.
We also see consistent buy signals across the major indices - NDX, XLK, RSPT and SMH with the trend having slowed down considerably over the last few sessions, and price having retested some key technical bases.
Neocloud stocks CRWV, NBIS and IREN continue to trade heavy but also show trend-exhaustion signals with oversold oscillator readings.
NVDA, MU and SNDK charts have a more convicing case for a trend reversal.
Lastly, to compliment all the trend-exhaustion signals we are seeing, stabilisation in the tape so far this week has led to the Friday vol spike to get 'crushed' and it looks set to ease even further today.
It is hard to know how the market will react to upcoming earnings, but I think there is good value here with a confluence (we love that word) of strong technical signals to test the waters. At the very least, I think this is a tradeable dip and do like a mix of semis and data centre stocks with a preference for MU and SNDK on the semis, and NBIS though CRWV and IREN provide very similar risk/return profiles.
For those that do not actively trade stocks, long NQ(NAS100) and even RTY(US2000) would be the trade to focus on instead of the ES(US500) which will likely underperform due to performance offsets in the sector/factor rotations.
