Over the past few weeks, one word keeps popping up into my mind to describe current stock market conditions: narrow. While the Nasdaq and S&P 500 are within striking distance of new all-time highs, there is a different picture under the surface for those who wish to take a deeper look.
New highs-new lows does not show a market dominated by news highs. Instead, it shows a market that has produced more lows than highs recently. The rally we saw this year has been dominated by beaten down names rallying into overhead supply, not stocks making new all-time highs. The advance-decline is also near its' lows while the Nasdaq Composite is near its' highs, another sign of narrow leadership. While the Nasdaq did produce a follow-through day recently, it's really of no importance if individual stocks are not setting up near buyable pivots. Stocks like NVDA and META are close to all-time highs, while the Russell 2000 continues to build a base near its' 40-week line.
In addition, we are entering a time of year that is often difficult for traders, with August and September usually two of the weaker performing months. I'd actually prefer to see the market come in here and see the Vix rally. This would shake out weak hands and allow individual stocks to build the right sides of their bases. If the 1990-2022 comparison I wrote about last week continues to hold up, then we are likely to see some choppy action over the next few months. While this would be frustrating, it would be constructive long-term as it would lay the foundation for a strong uptrending market.
All of this leads me to one of two scenarios. The first would be that the Nasdaq and S&P 500 continue to hold up, but we start to see the rally broaden with participation from more and more stocks. The second would be that the market, which already has narrow leadership, begins to falter in September. This is the scenario I'm leaning toward and would prefer, as it would frustrate impatient traders, but would lead to enormous opportunity for those that are patient enough to wait for the fat pitch. With not many stocks setting up near constructive buy points, the game plan for this week is simple: sit back and wait until the market gives the signal that it's time to get aggressive.
Risk right. Sit tight.
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