Republic Risk: Rebound or Bull Trap?

Federal Reserve Chairman Jerome Powell heads to Congress on Wednesday while we discuss a very deceiving trend for some investors.

Equity Storm Watch Is GREEN on the S&P 500 and GREEN on the Russell 2000

Futures markets are rising this morning after the worst trading day we’ve seen in a month. Now, here’s where it gets tricky. Will we see a rebound (as we’ve witnessed in Bitcoin after Coinbase’s flash crash), or is this the start of something more significant as the markets take a breath from the massive post-October rebound? That’s what we’re looking for. So far this morning, tech stocks have liked the big post-earnings surge of CrowdStrike (CRWD).

There has been sizeable selling—with increasing weakness on the Russell 2000 (IWM)—as small caps remain under pressure. While our indicator is green, and the IWM is 2.5% above its 20-day moving average, please be aware that there is rising selling pressure on the sector that typically precedes a shift in Equity Signals into the Red. That said, since the largest amount of selling was in the crypto mining space, that selling pressure may be relieved this morning. 

Energy is getting a bid, but technology is seeing large amounts of selling. Five sectors are facing a rise in selling pressure: tech, cyclicals, utilities, financials, and communications—all largely driven by smaller-cap names. 

When we have distinct selloffs in the market, they typically follow a stair-step pattern of lower highs and lower lows. This is important because institutions use short-term pops to exit positions and buy the dip when markets are oversold in the short term. Rinse and repeat. We’ll continue to monitor this situation - as there are plenty of concerns heading into this morning.