Don here…
The S&P 500 dropped 100 points today while the advance-decline line sat at 50-50. That combination should not be possible.
Tech is selling off hard. Broadcom cratered after hitting all-time highs. Nvidia is stuck in the mud. Microsoft keeps taking hits. Google broke outside its expected move to the downside.
Yet the broader market looks calm on the surface because traders are playing the rotation game. Capital is flooding into financials, Walmart, Boeing, and Tesla to mask the damage in tech.
This is a false sense of security.
I’ve been watching the S&P futures trade in an 80-point range between 6820 and 6900 for nearly two weeks. We’re now sitting right at the lower edge of that volatility box. A crack through 6800 opens the door to significant downside as correlation kicks in across sectors.
Here’s what makes next week particularly dangerous:
- The bond market is breaking down despite the Fed’s rate cut. The 10-year yield is pushing toward 4.2% and closing the week considerably higher than it started.
- Back-to-back weeks of lower-edge expected moves in TLT. This signals trend-worthy selling in bonds.
- Bond vigilantes may be arriving soon. Interest rates rising while markets sell off will slam every sector.
When bond market stress combines with tech sector weakness, the rotation game ends. That 50-50 advance-decline line will collapse. All those financials and defensive names propping up the market will get dragged down with the passive investment flows.
I took a bearish position in XLF today but held off on additional trades. I’m waiting for higher degrees of correlation before fully repositioning.
Triple witching arrives next Friday with trillions in options expiring. Monday and Tuesday are when the real action typically begins.
