Stocks Drop On December 4

By Michael Kramer of Mott Capital Management

Monday, December 4, 2023 7:15 PM EST

Stocks finished the day lower, with the S&P 500 declining by 54 bps and the NASDAQ 100 dropping by 99 bps. Today felt like a continued rotation from what was seen on Friday when small-caps and cyclical rallied, and large-cap technology struggled.

I think this rotation is most visible in the S&P 500 growth ETF to S&P 500 value ETF, which shows a breakdown that is occurring currently. The ratio shows a clear head and shoulders pattern, which formed and broke, and projects that the growth ETF continues underperforming the value ETF. How that plays out is anyone’s guess because the ratio only tells performance on a relative basis, but not the direction.

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Interestingly, today, the NASDAQ gapped below the uptrend that formed from the December bottom one year ago. This seems essential because the index recently gapped above the trend line on November 14. It may be nothing, but generally, when gaping above or below a trend line, it could be a sign of a breakout or breakdown. I will be taking this gap down today as a warning message.

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The NASDAQ 100 also gapped below the 10-day exponential moving average, which could signal a change in trend. As long as the index stays below this moving average, it would be consistent with a move lower having started.

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Nvidia has been trading below the 10-day exponential moving average for a few days and may already signal a trend change for the broader index. It has also failed twice at that $500 region, both around earnings. When stocks report better-than-expected results and guidance and do not go higher, it tells you a lot about the potential direction of the price.

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Banks have benefitted at the expense of technology and can potentially work for some time as long as the soft landing narrative persists in the broader market. The KRE is getting close to resistance at $49.50, and the ETF can clear resistance. It probably has room to run to around $56, where resistance appears at the July and December 2022 bottoms.

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