Last week the much anticipated Robinhood (NASDAQ:HOOD) IPO and several high-profile earnings announcements revealed a lot about investor sentiment and what to expect for the market’s trend going forward.
First, the Robinhood IPO had the potential to create an obvious indicator of a market top considering:
- It has created a movement that has enabled and enflamed the belief that the stock market was an easy ticket to riches in a generation of new market participants that are savvy practitioners of making ideas go viral.
- It gave 25% of the IPO allocation to its customers. Normally the retail investor would get about 10%.
- It got the “stamp of approval” from Cathie Wood, who is viewed as one of the hottest stock pickers, as demonstrated by the fact that she bought 1.3 million shares after the IPO opened.
- If the IPO had exploded higher, this IPO event would have almost certainly decorated the covers of every major publication. I would not be surprised to find it on the cover of Time, which is a classic “market top” indicator.
- A hot IPO would have not only rewarded its customers, but most likely encouraged the meme stock traders to buy more.
In short, a big jump after the IPO with all the typical fanfare would have been a stereotypical “irrational exuberance” event. Instead, as markets often do, the opposite occurred, and the bulls should be thankful.
As you may already know, i’s been labeled as the worst IPO of its size ever. Retail investors who finally had the opportunity to “get in early” (at the IPO price) got hurt. Social media seemed to have more negative sentiment than positive and several companies that were expecting to IPO soon, decided that now was not the right time.
The bulls should be thankful that this event didn’t create an excessive blow-off top event in the market.
Now, what can we learn from this? Retail trader market sentiment is not as bullish as one might have thought? If you don’t prevent a segment of investors who would like to get in on the IPO price from having that opportunity, you may not have enough new buyers on opening day?
I’m not suggesting that the normal condition, whereby most retail investors are not able to participate in pre-IPO pricing is fair, but if that changes, so will the way markets operate. This could be a case of “beware of what you wish for.” The savvy trader knows to always be on the lookout for the market’s unintended consequences. Even Goldman Sacks and JP Morgan working together can’t prevent the market from sinking a stock.
The bearish open also gives traders an opportunity to use the strategy of waiting for an IPO to form a range and play the breakout. This approach can work very well when the high of that range is the IPO day.
Last week’s earnings announcements provided some very similar information about traders’ sentiment. Stocks such as Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL) had strong earning reports that were met with selling.
Good news met with bearish price action is bearish. However, the most likely time for the market to react in a significantly negative way is when there is bearish news. As a result, be careful about buying a dip that is the result of bearish news. Additionally, we’re entering one of the seasonally weakest times of the year.
Barrons reports that:
“According to data going back to 1928 compiled by Bank of America analyst Stephen Suttmeier. He finds that the S&P 500 index had a negative return averaging 0.03% in August, September, and October—the worst three-month span of the year for the big-cap benchmark. In fact, they constitute the only three-month period that averages in the red.“
This data doesn’t need to imply a big move lower, but combined with the analysis below highlighting the market’s lack of, or even declining, bullish momentum, suggests it’s time to be very focused on risk management.
Past week’s market highlights
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- The Risk Gauge ($) moved back into bearish territory on the SPY.
- Major US equity indexes consolidated last week, but one notable development was the S&P 500 Value index tracked by IVE broke above its 6-week range and 50-day average. This can also be seen in the VTV ($). The significance of this is that bull markets are much stronger when both SPY and IVE are in bullish trends.
- Daily Real Motion indicators continue to show bearish momentum ($) trends in DIA and IWM and demonstrating resistance at current levels in SPY and QQQ. However, the weekly Real Motion trends remained bullish in all 4 indexes.
- Volume Accumulation/Distribution measures were weak with 3 distribution days, but that’s not bearish yet.
- The best performing sectors last week were Semiconductors (SMH) and Materials (XLB). SMH ended the week on a new all-time closing high, but hasn’t definitively broken out of its month-long range. A breakout could indicate some new and much-needed sector leadership. XLB had a consistent uptrend for the week, broke out over a 6-week range, and closed marginally over its 50-day moving average for the first time since mid-June.
- Homebuilders (XHB) ended the week strong, and are sitting at the top of an important two-month range.
- The only sector to decisively trend into new all-time highs was Health Care (XLV), which is also the only sector that has bullish readings in all 4 of the Real Motion and Triple Play indicators reported in the Sector Performance Summary table
- Solar (TAN) is listed in our Six-Month Laggards table, but also showed up on the Five Day-Leaders table. It has a bullish looking retracement to the 50-day moving average (DMA), and a move above Friday’s high would break the retracement trendline.
- Market Internals are at neutral levels, but continue to trend higher as they work off extreme oversold levels hit on July 17. Extreme oversold levels can set up extended moves higher.
- The New High/Low ratio has continued its bearish pattern of moving from above to below the 85 level. This is best seen on the NASDAQ chart. If the market pulls back, it will be concerning if the number of new 52-week lows expands to more than 200.
- Long-term bonds (TLT) ($) were consolidating at the 200-DMA with a bullish Real Motion divergence pattern. This suggested that bullish breakout could run higher.
- Emerging markets (EEM) were dragged down by China’s market plunge. EEM now sits below its 200-DMA ($) and under a 5-month range.
- China (FXI) continued its decline last week, but it may have hit a capitulation low when plunged to the 38 level then immediately bounced almost 10% the following day. $38 has been an area of support in years past, and Real Motion hit an oversold level that has marked significant lows.
- Copper (CPER) broke above its 50-DMA ($) early in the week and consolidated above it. It’s sitting under Real Motion resistance, so last week’s range will likely be pivotal.
- Oil (USO) continued its recovery ($) from sharp correction to its 50-DMA, however, the energy stock ETFs—XLE, OIH, XOP)—have not recovered. This combined with a Real Motion resistance and a short-term bearish divergence, suggests any weakness could lead to another correction.
- Gold (GLD) tried to breakout of its 1-month range ($), which would also be a break of both the 50 and 200-DMA. Traders will certainly be watching this level closely with such a convergence of popular technical levels. A significant breakout could pull Real Motion in a bullish trend for the first time in 2021.
- The dollar (UUP) may be the reason GLD doesn’t have a bullish breakout. Gold tends to underperform when the dollar is strong. UUP was sitting on its 50 and 200-DMA as the 50 was about to cross the 200 to create a bullish phase that has not existed since May 2020. Long-term Real Motion indicators have a bullish divergence ($) pattern that has been developing in a ‘textbook’ fashion since January 2021. If UUP can break above $25, a major bottom may be in place.
Cryptocurrency weekly highlights
- BTC was sitting right above $41,000, with market sentiment once again being a battle between the bears expecting a crash back down to $30,000, and the bulls hoping for a larger move over $41,000 with the next level to beat around $43,500.
- The Real Motion indicator identified a market phase change from distribution to bullish several days before Bitcoin’s price action indicated a buy signal.
- Expect the altcoin market (any cryptocurrency that is not Bitcoin) to continue to follow Bitcoin’s trend, whichever way it may have decided to move over the weekend and into the first week of August.
- There is a chance for the historically tight correlation between Bitcoin and Ethereum to diverge this coming week, with a significant update to the Ethereum network scheduled for Aug. 4.