The deposit outflow from the banking system into short term T-bills exposed the weak link in a seemly strong economy and resilient stock market. The continued strength in the NASDAQ is the strongest evidence in asset rotation in the current stage of the stock market and economy. The market is indeed worried about recession therefore funds have flown to the mega tech safe haven, which in turn popped up the NASDAQ index.
While the DOW and S&P 500 failed to take out their perspective February 2023, but the NASDAQ did take out its February 2023 high indicting a breakout. But this breakout is not confirmed by the DOW and S&P 500 and it’s not trustworthy. This new NASDAQ high is caused by asset rotation into mega tech to seek safe haven and also the enthusiasm about AI created an appearance that all is well.
The S&P 500 topped on 05/012023, and the NASDAQ continued to make a new high on 05/12/2023. But the NASDAQ produced a sell signal on 05/12/2023, meaning the NASDAQ high was finally rejected and now the NASDAQ should join the DOW and S&P 500 to enter a period of correction. The negative fundamental news about debt ceiling probably will be the catalyst to drive the market down even though the market has been quite complacent about the debt ceiling fight. It is inconceivable for the Unites States to default its debt. We suspect the default won’t occur but it will be a scary ride to the final resolution, therefore we will see volatility in the stock market. Perhaps the volatility in the stock market will force both sides to come to the table to settle the score.
We have turned bearish since 05/04/2023 because the DOW and S&P 500 took out an important daily low that day. But the continued strength in the NASDAQ did cause us to second guess our thinking several times. Now finally the NASDAQ has joined the DOW and S&P 500 to enter a period of correction. We want to emphasize that it is a correction, not a crash. We are just looking to make some money during the weekly cycle high to low phase.
Below is the NASDAQ daily chart. It is 13 days into the current daily cycle and 8 weeks into the weekly cycle. The daily and weekly cycles are entering plausible top timing band, meaning it is in a plausible time to have a high made here. And it is also pressing against a trend line that it hasn’t been to break above since this weekly cycle began.
We anticipate the stock market will start to trade to the downside slowly since the NASDAQ has just synchronized with the DOW and S&P 500. As we getting closer to the debt ceiling x-date, volatility will pick up and the movements in the stock market will be faster. We have kept our covered calls short position and will try to buy puts or VIX calls this week.