[Outlook] The Economy Shows Signs of Slowing and Hits Stocks Hard.

But it May Not Be Time to Sell Your Stocks (Yet). The Economy Shows Signs of Slowing and Hits Stocks Hard. But it May Not Be Time to Sell Your Stocks (Yet). By Donn Goodman August 04, 2024 Welcome back readers. Hope that you had a good “summer” week and that the sudden shift from positive to negative in the markets did not catch you off guard. We will explore… On all accounts, it has been a good 2024 in the market so far. Yes, by all measures, the markets have been narrowly traded, and unless you bought and owned the mega-cap technology stocks, you may find yourself well under-performing the major market indices. As we have pointed out over the past few weeks, there is a major rotation going on between sectors of the markets. If you have not had a chance to read last week’s Weekly Outlook on the rotation going on, [please go here to access the article](). Until this past week, it was an orderly movement from large-cap technology stocks (and anything even remotely related to AI) rotating into large-cap value-oriented sectors, which included financial, insurance and homebuilding stocks as well as into small cap stocks. It is interesting to note that some tech related companies came out with earnings at the beginning of the week which attracted money to swiftly rotate back into tech stocks only to get smashed on Thursday and Friday. If you were to study the past few weeks, you would recognize that money has flowed into beaten up, lagging stocks that may have gotten big buying for the mere fact that they present better intrinsic valuations and NOT necessarily because they have stellar earnings. So far this year, the mega cap tech stocks have been printing money and only when the market realized that they were paying too high a price for the future earnings of these darlings, did momentum begin to shift. More on this in a few minutes. A decidedly down week for the markets. This was a bad week for most areas of the markets. The tech heavy NASDAQ (QQQ) continued its sell off which began in the middle of July. The hardest hit area this week was the small cap index (IWM) which gave back much of the past few weeks’ explosive rotation. The Dow Jones Industrial (DIA) held up the best as money continued to flow into mega cap value-oriented issues. The standout winner for the week was bonds as we saw the 10-year rates drop below 4%. For those keeping tabs, here is the scoreboard for the different markets and asset classes: It was a seesaw this past week. Wednesday was a huge up day in most of the above referenced markets followed by two ugly negative days unless you were a bond investor. Friday, by far, finished the week off in a negative fashion. Other than Apple, which had reported good earnings on Thursday evening, not much else was in the green. See below. (note the picture of Jerome Powell which we will get to in a minute). The area hardest hit within Technology stocks were the semiconductor companies (chips). They have seen a negative downdraft since the middle of July. Then you had Intel report terrible earnings and a reduction in their dividend. That stock fell by 35% or more this past week. See below: Perhaps given the appreciation in many Chip stocks, like Nvidia, AMD and ARM Holdings (and others) and the large profits people had from participating in the AI/Technology move up, the past two days triggered some panic selling. Goldman Sachs measures this and provides the chart below showing this past week along with similar periods. Interesting to note that while money was coming out of technology stocks, some of it did find its way into more defensive areas of the markets in Utilities and of course the bond market. See graph below: Bonds were the big winner last week as noted above. They had the biggest one week move in over a year. Most yields came down rather dramatically across all time periods. See charts below: For institutional funds as well as many investors, including 401k participants, this type of sell-off in stocks and a rally in bonds is a natural way to rebalance portfolios. It was a great week for the 60/40 portfolio. $AGG/$SPY which jumped +4.25%, marking its best week since March 2023. However, this was a risk-off move, indicative of a flight to safety. That can have a dampening effect on the equity markets for some time. See graph below. Equal weight indices really illustrate that it has been the few mega-cap tech stocks that have been driving the cap weighted index performance. We covered this in some detail last week. Proof of this is to compare the QQQ, currently still up 9.6% year-to-date against the equal weighted QQQ which is now down for the year. This shows the perspective that the average stock within the NASDAQ is down on the year. This is called a true “stock picker’s” market. See chart below: I tripped on the below chart, which shows all too clearly just how extended the S&P 500 had gotten as compared to a typical positive, upward market that would normally have a different upward sloping trend. See chart below: Interestingly, the below chart shows a current comparison of the S&P 500 to a similar period in 2022. You will notice the similar time and advance made by the index. This may provide some time clarity on the recent run. See graph below: According to Ryan Detrick of The Carson Group, these kinds of sudden corrections are to be expected. This reminds us that occasionally that frothy and over extending markets need a corrective period of consolidation. See graph below: Use the links below to continue reading about: - The historical frequency of corrections - The economic reports that sent the market lower on Friday - Reasons for the market’s sell off - Reasons to consider ‘buying the dip’ - Seasonality stats - The Big View Bullets - Keith’s weekly video market analysis [Click here to continue to the FREE analysis]([Click here to continue to the PREMIUM analysis](=) Best wishes for your trading, Donn Goodman Every week we review the big picture of the market's technical condition as seen through the lens of our Big View data charts. The bullets provide a quick summary organized by conditions we see as being risk-on, risk-off, or neutral. The video analysis dives deeper. Risk On - Volume remained [overall all positive]() for DIA and IWM (despite being down -6.8% on the week). (+) Neutral - All of the[modern family members]() took a hit this week, but half of them remain in a bullish phase. Transports and retail dropped on Friday into warning phases, some of the best indicators of how robust the economy is. Neutral at best. (=) - We are heading into a period of flat-to-weak performance based on [seasonal-trends]( with August and September clearly the weakest. (=) - [McClellan Oscillator]() for Nasdaq flipped to a negative reading, while the S&P is hanging onto a neutral reading. (=) - 52-Week New High New Low ratio [broke down hard]() with potentially a lot more downside possible for the Nasdaq. S&P remains far more positive. (=) - The [color charts]() (which are % of stocks above key moving averages) show IWM still positive on all time frames(+). Meanwhile, the QQQs are breaking down on a short and intermediate term for an overall negative read (-). While the S&P is giving a sloppy but neutral reading. (=) - [Gold]() firmed up this week as a flight to safety and the prospects of increased tensions in the middle east. (=) Use the links below to continue reading about: - The historical frequency of corrections - The economic reports that sent the market lower on Friday - Reasons for the market’s sell off - Reasons to consider ‘buying the dip’ - Seasonality stats - The Big View Bullets - Keith’s weekly video market analysis [Click here to continue to the FREE analysis and video.]()[Click here to continue to the PREMIUM analysis and video](. Best wishes for your trading, Keith Schneider CEO MarketGauge P.S. When you’re ready, here are 3 free ways we can help you reach your trading goals… - [Book a call with our Chief Strategy Consultant](), Rob Quinn. He can quickly guide you to the resources that you'd like best. - Get the foundational building blocks of many of our strategies from Mish's book, [Plant Your Money Tree: A Guide to Building Your Wealth](=), and accompanying bonus training. - [Review quick descriptions]( of our indicators, strategies, services and trading systems here. 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