OVERVIEW
Down Goes The Ship

Tuesday saw US stocks closing the day with significant losses, marking the end of Wall Street's toughest month in 2024.

This downward trend was fuelled by labor data surpassing expectations, as investors anxiously await the Federal Reserve's upcoming interest rate decision. The fresh figures from the Bureau of Labor Statistics revealed a notable surge of 1.2% in the employment cost index from December to March. This increase, the most substantial in a one year period, followed a 0.9% rise recorded at the close of 2023.

To make matters worse, the Treasury yields experienced a sharp increase following reports indicating that employment costs in the first quarter exceeded initial projections.

This spells trouble for stocks because rising Treasury yields typically signal higher borrowing costs for both companies and consumers. As borrowing expenses escalate, there's the potential to hinder economic growth and diminish corporate profits, subsequently dampening stock prices. Furthermore, the heightened yields on Treasuries make them more appealing to investors than stocks, prompting a shift in investment preferences away from equities. This redirection exacerbates the downward pressure on stock prices.

QQQ: Large Caps

The Nasdaq, recognized for its substantial representation in the high growth technology sector, witnessed a notable surge in trading volume, leading to a significant breakdown below its daily 10, 20, and 50-day Exponential Moving Averages (EMAs). Additionally, during pre-market trading, it is currently displaying a gap down below its weekly 20-day EMA.

In our Tuesday report, we underscored the importance of the QQQ maintaining its position above $430 for a potential, albeit unlikely, bullish scenario signalling the conclusion of the pullback.

However, this expectation has not materialised. Instead, the QQQ has formed a clear bear flag on its daily chart, characterised by low volume. Such technical patterns often herald a more pronounced downturn.

We anticipate that the Federal Reserve's rate decision will trigger a highly volatile move, potentially in either direction. Our expectation is for a swift and sharp downturn over the next week or so, which we hope will culminate in a selling climax. This should create an opportunity for us to start building an accumulation base before initiating the next upward cycle.

MDY: Midcaps

The S&P MidCap 400 is providing a much clearer illustration of the breakdown prompted by yesterday's price action. The MDY typically follows the movement of the QQQ, so it's unsurprising to observe the midcaps also experiencing a breakdown.

This synchronicity in movement between the QQQ and MDY underscores the broader market sentiment and reinforces the significance of recent developments. As the QQQ demonstrates weakness, it's reflected in the performance of the midcaps, indicating a widespread downturn across all capitalisation segments of the market.

IWM: Small Caps

Among the three major indices, the Russell 2000 is performing the poorest. Yesterday's sell-off was triggered by a clear rejection at the $200 level, marked by the declining daily 50-day Exponential Moving Average (EMA).

Last time, the IWM managed to find support at the daily 200-day EMA, a critical level that must be fiercely defended by aggressive buying demand. Should sellers breach the $192 demand zone, it would signal significant trouble for small caps, potentially leading to a more severe downturn.

Summary

Now is not the opportune moment to establish exposure in either direction. With the impending Federal Reserve meeting, a significant price swing in the markets is expected. We are hesitant to initiate long or short positions, despite being a long-only institution, as it's inherently risky to predict how the market will respond to either hawkish or dovish signals from the Fed. Therefore, we prefer to wait on the sidelines until there is more clarity on the Fed's stance and the market's reaction.

We've adopted a defensive stance by holding cash since the mid-March sell signal, and we intend to maintain this position until we detect a change in market sentiment.

We strongly advise all our readers against risking their hard-earned capital by speculating on price swings, especially during a period marked by numerous unknown factors. It's crucial to prioritise capital preservation and exercise caution until clearer signals emerge regarding market direction and sentiment.

DAILY FOCUS
A Breakdown In Leaders

As mentioned earlier, our primary market gauge isn't solely reliant on macroeconomic indicators or specific indices. Instead, we closely monitor the performance of top-performing stocks exhibiting the highest relative strength, which historically have led the market.

Regrettably, we've witnessed a comprehensive breakdown in nearly every leader on our watchlist. This, again, gives us confidence now is the time to wait. We are not out of the weeds yet.

Here are a several examples:

MSTR: MicroStrategy Incorporated

COIN: Coinbase Global, Inc

GCT: GigaCloud Technology, Inc

WATCHLIST
The Few Holding Up

ADCT: ADC Therapeutics

• Despite the challenging market conditions, ADCT is showing resilience by maintaining its position above its 50-day Exponential Moving Average (EMA) ahead of its earnings report.

• While we remain cautious due to the breakdown observed in other leaders, it's worth noting that healthcare-related stocks often exhibit outperformance during challenging market environments.

AFRM: Affirm Holdings, Inc

• Affirm is demonstrating resilience by finding support at its daily 200-day Exponential Moving Average (EMA) and is in the process of constructing a brief sideways base as it approaches its earnings report.

• We're closely monitoring Affirm's ability to maintain these support levels and ideally continue its consolidation phase.

• While we remain cautious and are refraining from entering any positions until we observe improvement in the overall market breadth, it's conceivable that Affirm could emerge as one of the initial stocks to lead the market out of the correction phase.