Happy Sunday to all,
Interesting that Keynes gets the credit for this saying, when in fact, it was another famous economist, Paul Samuelson, who actually coined, "When the facts change, I change my mind. What do you do, sir?"
First off, before we get into why we have pulled in our bullish horns significantly, please see the attached – a very intelligent read from Elliot Investment Management L.P., which offers a number of thought provoking counter points to the AI Bull Thesis. Worth the perusal.
So, what's changed? Well, to state the obvious, volume has spiked. Duh, tell us something we don't know, Henderson.
Well for us, and for our Inflection Point methodology, whenever the $VIX sprints into the $20s, our process goes into “AUTO PAUSE” FOR ANY NEW LONGS until we see a decisive turn lower in volatility. Not to mention, many other components, proprietary to our quant market-timing system, need to turn back positively, as well.
Note how the last time the $VIX was living in the $20s consistently, it marked the beginning of the Bear Market in 2022?
Simply put, while others may thrive during periods of high volatility, our process does not. Know thyself. It's a key tenet for living not only a successful life, but also, for surviving 30 years of trading the stock market.
We learned the hard way years ago, about trading during periods of high volatility. It does not work for us. To those for whom it does, we give a hat tip.
Last week, in another clear change in character, stocks also went down on bad news. Bad news is once again BAD NEWS. That's new and troublesome. Even with the 30-year dropping like a rock last week by 40 bps, Housing, Financials and Small Caps all took it on the chin.
To wit, housing stocks reversed by 10% from their highs IN TWO DAYS, even in the face of the 10-year diving below 3.80%:
Our process is at its best when the $VIX is living below $16 and when we are in a strong up-trend where New Leadership is manifesting in various leading groups.
Almost all of our ~ 280% gains this year have come from the two highlighted periods below. As soon as we began getting chopped up a few weeks ago, when the $VIX awoke from its multi-year slumber, we started bringing down our size.
So, even though we got dinged last week, we are not very far from our high water marks on the year. Please take a look.
As trend traders, we never pretend to pick the tops, nor pick the bottoms. But, we usually exit Stage Left pretty adroitly not too soon after market peaks. More importantly, with new leaders ALMOST ALWAYS breaking to new highs well before the indices do, typically we garner outsized alpha just before a new up-trend is confirmed.
To repeat one last time, to all the new subscribers who have recently joined our exclusive club, our process is best during periods of low volatility and strong up-trends, NOT during periods of high vol such as now.
Our mission at Top Tier Inflections is simple: Rack up outsized-gains during strong up-trends and avoid losses until market corrections end, thereby protecting the hard-earned gains we have helped guide you to thus far this year.
Follow our lead for when to wax on and wax off. For now, we plan to wax off. Thus, this missive.
In addition to volatility spiking, a favorite indicator of ours is the New Highs/New Lows on the NASDAQ, which moved down to dangerous levels late last week. Suddenly, new lows are dwarfing new highs. This is always a danger signal to us and one we pay close attention to, as we will need to see it climax, wane and then turn up before our process gets back into vogue.
When the facts change... Well, I think you get the point.
Looking ahead, while I expect this week's likely dovish CPI to catalyze a bid to an oversold near-term tape, NVDA's delay in Blackwell being delivered SHOULD MEAN we see the unthinkable in late August - a miss on its forward guide for the next quarter, or two. If this occurs, watch out below should the QQQs and the NASDAQ break sharply below their 200-days like we think they will. In such a scenario, the QQQs and NASDAQ would quickly be in their own personal bear markets.
Futures look gory tonight. In addition to the sharp downturn in the Mag 7, Semis, the QQQs and Software's toppy action, for us, a bigger concern in the near-term has been the dynamic turn lower in Mid-Caps, Small-Caps and the Dow. It’s never good when breakouts fail and you see a swift move back into previous basing patterns.
Failed breakouts often lead to swift heartbreaks simply because there are so many longs trapped at similar levels. Mid-caps look particularly vulnerable. What if the bond market has it right and a recession has already started? For those open to this worldview, suddenly, it's a lot easier to see a potential imminent break in the next 3-6 weeks below the 200-day SMA versus a move back to new highs, isn't it?
As for shorting, if volatility is your thing, we like Software as a short on rallies.
The IGV on any near term pull up toward its 200-day above $81 should serve as a good entry. Also, watch out below on any close in the IGV below $76.50, as this would mark a lower low on the intermediate-term timeframe. Shorts in IGV can be pressed even more aggressively on a close below $76.50, as we would then see an immediate follow through move lower. Thereafter, a move into the $60s by early Q4 would be very viable:
SNOW, WDAY, CRM and PCOR look actionable here as shorts as well, particularly on rallies back up into resistance.
Because gains on shorts are difficult to come by and offer limited potential, our focus during periods of high volatility is simple. We focus on stocks like MELI, ALNY, FEIM, LMT, NOC, WLDN, GDYN (to name a few) exhibiting strong Relative Strength.
Typically, our watch list will expand first and then, one day, when the macro news is bad and the action in the major indices is still not great, out of nowhere, we will see a spate of new highs. Shortly thereafter, these burgeoning new leaders will break out en masse, providing us the best tell that the correction is finally over.
In summary, it's early August. We are under serious distribution, the calendar is horrible for another six weeks and then we have six weeks until the election. Our inner voice is screaming to chill, especially with our year already in the books and our process suddenly out of vogue.
Instead of going fishing as Jesse Livermore would, I am heading to Vienna, Salzburg and Florence for ten days in late August. My partner, Jason, is heading to Greece. We plan to be in touch with another market update after Labor Day.
Of course, should any Top Tier Inflection manifest itself the next two weeks, we will be in touch. As you might have guessed, should there be one final special pick or two that makes its way to you before Labor Day, it goes without saying that the sizing on any such position will be DRAMATICALLY LOWER than what we have been operating with most of this year.
A good rest of summer to all. Be careful out there.
I expect the $VIX to head into the $30s and maybe touch $40 before this correction is finished.
Best,
John
